Mortgage payment protection insurance – do I really need it?

Once you have found the right mortgage deal and got your foot on the property ladder, your mortgage is likely to be your biggest and most important monthly outgoing. The consequence of not being able to keep up with the payments means you could lose your home. It’s a sobering thought.

Mortgage payment protection insurance is a policy that covers your monthly mortgage costs if you can’t make repayments because you’re seriously ill, injured, or have lost your job.

Sometimes, this cover is described as ‘accident, sickness and unemployment insurance’, but in practice you can choose a policy that covers you only for one or two of these concerns. Or you can buy a combined policy, though cover for unemployment has been difficult to find during recent years.

'The redundancy element disappeared during the pandemic, but is coming back through limited suppliers,' says Kevin Carr, an insurance expert and managing director of Carr Consulting and Communications.

How does mortgage payment protection insurance work?

When you buy a policy, you start paying monthly premiums. You are then entitled to claim if you have an accident or fall ill, or lose your job, and you lose your income as a result. The insurance will pay tax-free monthly sums to cover the cost of your mortgage and bills.

Policies usually require you to wait for a time before receiving your first payment; this is known as a deferral period and is a bit like the excess on other insurance policies, where you meet the first chunk of the claim yourself. This could last a few weeks up to a few months.

Pay-outs usually last for one or two years, with a maximum benefit likely to be up to 65 per cent of your pre-tax salary.

How much does it cost?

This will depend on your circumstances and how much income you’re insuring, but you could reasonably expect to pay anywhere between £10 and £30 a month.

In one example, a female teacher in her late thirties was quoted £15 to £18 per month. This was for a combined mortgage payment protection insurance policy – covering accident, sickness and unemployment.

The policy was based on her earnings of £30,000 a year and monthly mortgage repayments worth £400. The deferral period was two months, and the policy was designed to pay £500 per month for a year.

In practice, prices vary according to a range of factors. For example, your age, your health, how much you pay on your mortgage, the type of work you do, and how comprehensive you want the policy to be.

Office workers are regarded as lower risk for accidents than builders, for example. The more high-risk your profession, the more expensive the policy.

You might get cheaper cover if you only cover accident and sickness, or unemployment, rather than a combined policy.

The longer the deferral period, the cheaper the policy. So, if you have a generous sickness policy at work, a longer wait time could save you money.

You might also want a pay-out to cover more than just mortgage payments. So, if you want a benefit to cover other bills too you will pay a higher monthly premium for that security.

Am I eligible for mortgage payment protection insurance?

Most people can buy this cover, but there are some traps to watch out for. Self-employed people will struggle to get unemployment cover, for example. And if you have a pre-existing health condition, it is likely to be excluded from the policy.

There are also standard exclusions for stress and back pain, and there’s typically an upper age limit of 65.

If you need help looking for protection insurance, speak to a broker. You can find one using the ‘find insurance’ tool from the British Insurance Brokers’ Association.

Do I need it?

You’re not obliged to have it, but it may prove valuable. Rose St Louis, protection director at insurer Scottish Widows, doesn’t mince her words on the importance of protecting your income.

She says: 'The vast majority of renters and homeowners have no cover in place and the impact of this could be really frightening.'

As St Louis points out, if someone cannot work because of ill health they 'may be unable to pay their bills and asked to leave their home'.

Still, while it makes sense to protect income, mortgage payment protection insurance isn’t the only option.

What other types of protection insurance are there?

• Income protection insurance does as it sounds – it protects income you’re paid through employment. It can cover your monthly outgoings if you’re too poorly to work or have an accident. Payments are also tax-free. Policies usually have fewer exclusions and last longer, but are more expensive.
• Life insurance pays a tax-free lump sum to your family if you die. You can also buy mortgage life insurance, specifically to cover your home loan.
• Critical illness cover pays a tax-free lump sum if you’re left dealing with a serious illness such as cancer.

It’s always wise to have savings too. But few people are likely to have enough in reserves to cope with significant periods of being off work.

Hope for the best, plan for the worst

Try the quick and free Percy the protection calculator from the Association of British Insurers. It gives you a better idea of your financial resilience if you’re too ill to work.