Mortgage protection insurance is often offered when you take out a mortgage. It promises to cover your mortgage payments if you die, become disabled, or lose your job. But is it the best way to protect your family and your home? Understanding how mortgage protection compares to alternatives helps you make an informed decision.
Convenience comes at a cost. There may be better options.
What Mortgage Protection Covers
Mortgage protection insurance typically covers three scenarios: death, disability, and sometimes redundancy. If one of these events occurs, the insurance pays your mortgage for a period or pays out a lump sum.
Death cover pays off some or all of your mortgage balance if you die. Disability cover pays mortgage payments if you cannot work due to illness or injury. Redundancy cover pays for a limited period if you lose your job.
The specifics vary significantly between policies. Some offer comprehensive cover; others are quite limited.
How It Differs From Standard Insurance
Standard life insurance pays a lump sum to your beneficiaries with no restrictions on use. Mortgage protection often only pays toward your mortgage.
Standard income protection pays a percentage of your income. Mortgage protection may only cover mortgage payments, leaving other expenses unaddressed.
The restricted nature of mortgage protection can leave gaps in your overall protection even if your mortgage is covered.
Cost Comparison
Mortgage protection is often more expensive than equivalent standard insurance. Banks and lenders add margin to the insurance they sell, making it less competitive than buying insurance directly.
Compare quotes for equivalent cover from insurance companies against the mortgage protection offered by your lender. You may find substantial savings.
The convenience of bundled mortgage protection has a price. That price may not be worth paying.
Flexibility Considerations
Mortgage protection is tied to your mortgage. If you refinance with a different lender or pay off your mortgage early, your cover ends.
Standard life insurance stays with you regardless of your mortgage situation. You can change lenders without affecting your cover.
If your mortgage balance reduces significantly, you may be paying for more cover than you need. Standard insurance can be adjusted; mortgage protection often cannot.
Redundancy Cover Limitations
Redundancy cover in mortgage protection policies is often quite limited. It typically pays for only a few months and has strict eligibility requirements.
You may not be covered if you are self-employed, on a fixed-term contract, or if redundancy was foreseeable when you took out the policy.
Building your own emergency fund may provide better redundancy protection than insurance with limited payouts and exclusions.
When Mortgage Protection Makes Sense
If you cannot get standard insurance due to health issues, mortgage protection may be available with simplified underwriting. This can be valuable if you otherwise could not get cover.
If you want simple, automatic cover without shopping around, the convenience of lender-provided insurance has some value, though you pay for that convenience.
For some people, the psychological comfort of knowing their mortgage is specifically protected outweighs cost considerations.
Better Alternatives
Standard life insurance with a sum insured equal to your mortgage provides equivalent death protection, often at lower cost, with more flexibility.
Income protection covers not just your mortgage but all your expenses if you cannot work. This is more comprehensive protection.
Building an emergency fund addresses redundancy risk better than limited insurance cover.
Making Your Decision
Do not automatically accept mortgage protection because it is offered at mortgage signing. Take time to understand what you are buying and compare alternatives.
Consider your overall protection needs, not just your mortgage. A comprehensive protection plan addresses multiple risks more effectively than mortgage-specific cover.
If you choose mortgage protection, understand exactly what is covered, what is excluded, and how much you are paying compared to alternatives.
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