Insurance

Mortgage protection insurance

Mortgage protection insurance is designed to pay off your mortgage if you die and runs for the same length of time as your mortgage. So, if you take out a mortgage over 20 years, your mortgage protection insurance must also be in place for 20 years.  You can however, change providers during the term of your mortgage.

This type of insurance does not cover your repayments if you cannot work because you are made redundant, or cannot work because of sickness or disability. For that type of cover, you need to get mortgage repayment protection.  Make sure you have considered all your options first.

How much does it cost?

The premium you pay each month for mortgage protection insurance depends on the size of your mortgage, your age, gender, the state of your health and whether you smoke. The premium is fixed for the term of the mortgage.

Do you have to take out cover? 

If you are under 50 when you take out a mortgage for a home you will live in, your lender must make sure you have mortgage protection insurance (or another life policy) to pay off the loan if you die. The main reason for this is to make sure your family home would not have to be sold to pay off the mortgage.

You do not have to take out this insurance if you are over 50, or if your mortgage is on an investment property, but it can be an advantage and some lenders may insist on it as a condition of getting the mortgage.

While your lender can insist you get mortgage protection insurance, they cannot insist that you buy it from them. You are free to shop around to buy it. Your lender must accept any suitable policy that is assigned to them.

What benefit do you get?

If you die, your insurance company pays the policy benefit direct to your mortgage lender. Your lender uses the amount needed to pay off the mortgage and, if there is any left over, they will pass it to your estate.

If you have a mortgage in your own name only, you would generally look for a mortgage protection policy to cover your own life. If your mortgage is in joint names, your mortgage protection policy will also need to be in joint names. This means that your mortgage is paid off if either one of you dies before the end of the term.

Types of mortgage protection

Generally, your mortgage protection cover reduces over time, as the amount you owe on your mortgage goes down. This is called 'reducing term cover'. It is the most common and the cheapest form of life cover.

You can also get a more expensive type of mortgage protection policy, known as a 'level-term policy'. This gives you the same amount of life cover throughout the mortgage term. It is usually used for an interest-only mortgage or an endowment mortgage, where the original mortgage amount is still owed until the end of the mortgage term.

But you can also use a level-term policy with a traditional decreasing mortgage. This means you will have more life cover than is needed to clear your mortgage at any point in time, so the extra benefit would be passed on to your dependants if you die.

If you wish to, you can add serious illness cover to your mortgage protection policy. This means your mortgage will be cleared if you die or if you are diagnosed with a serious illness that is covered by your policy. But your premium will be considerably higher if you choose to add on serious illness to your policy:

These quotes assume that the cover is for a man aged 30 and a woman aged 28 on their next birthdays. Both are non-smokers and in good health. Details are correct as at May 2009.

Check out our life insurance cost comparison to get more information on costs.

Do you have to buy mortgage protection insurance from your mortgage lender?

Most mortgage lenders offer to arrange mortgage protection insurance for you when you apply for a mortgage However, you do not have to take the mortgage protection policy your lender offers you. And your lender cannot refuse you a mortgage just because you don't accept the policy they recommend.

It may be convenient for you to arrange your mortgage protection insurance through your lender as you will usually pay your premiums as part of your mortgage repayment. However, be aware that if you buy the policy through your lender, you are insured under the lender’s group policy. This may restrict you if you want to switch your mortgage later on as your lender will automatically cancel your mortgage protection insurance when you move your mortgage. This means that you will have to buy new mortgage protection and the older you are, the more the premium will cost you.

What happens to your policy if you change your mortgage?

That depends on whether you are:

• topping up or extending the term of your mortgage
• switching your mortgage
• paying off your mortgage early

You should not cancel your mortgage protection policy unless you have another policy in place.

If you are topping up your mortgage, you could get a new mortgage protection policy for the total amount of your new mortgage, or just for the top-up amount. Compare the costs and benefits of both options. It may be cheaper to keep your original mortgage protection policy going, and buy another policy for the top-up amount. But check what it would cost you to cancel the original policy and replace it with a policy for the full amount of the new mortgage.

Whether you are topping up your mortgage or extending the term and need to get a new policy, you may find that your premium is higher than the last time you took out cover. This is because you are older and your age affects your premium. However, if you have given up smoking, or if rates have come down since the last time you applied for cover, you may be able to get cheaper cover.

It is worth shopping around to see which provider gives the best value - use our life insurance cost comparison to help you. 

If you switch your mortgage, your options depend on whether you have your own policy or a group policy through your lender. 

• If you have your own policy, you can simply transfer it to your new lender. The premium and level of cover will be the same as before, as long the amount you borrow and the term of your mortgage does not change. 
• If you have a policy through your lender’s group scheme, your lender will cancel the policy when you switch your mortgage. So, you will have to apply for cover again and it may cost you more, as you will be older than when you first took out the policy. And if you are not in good health, you will have to pay a higher premium or you may not be able to get cover at all. Before you switch your mortgage, make sure that you can get mortgage protection insurance if your current mortgage protection is through your lender’s scheme.

If you pay off your mortgage earlier than planned, you can: 

• cancel your mortgage protection cover and pay no further premiums or 
• keep the policy and pay premiums until the original end date.

If you decide to cancel the mortgage protection cover, always check with the insurance company that the policy has been cancelled. Where the policy has been arranged through your lender, your lender will cancel the mortgage protection policy on your behalf but you may want to check to make sure. If the policy has not been cancelled by your lender, ask the insurance company what your lender needs to do to ensure the policy is cancelled and no more premiums are collected from you. Also make sure that if you have been paying premiums by direct debit, that you cancel the direct debit in writing.

If you pay off your mortgage earlier than planned, it is a good time to consider whether you need additional life insurance. If you decide to keep your existing policy, it would no longer need to be used to clear your mortgage. So any benefit would be paid to your dependants if you died before the policy finished. This could be a useful source of extra life cover. On the other hand, you may decide to take out new life insurance, depending on your age and state of health. 

You may not have this option of keeping your mortgage protection policy if it was taken out through a group policy with your lender, as they will usually close off the policy when your mortgage is cleared.

Do you need mortgage protection if you already have life insurance?

Generally, mortgage protection is designed to pay off your mortgage if you die, not to provide a cash sum to your dependants (unless you get a ‘level-term policy'). So, you will usually need separate life insurance to provide for a cash lump sum if you have a dependant family.

You can, if you want, use an existing life policy for mortgage protection, so long as the sum assured (amount you are insured for) is at least equal to your mortgage and it runs for the same term. To do this, you would have to ‘assign' the policy to your lender. This means you would agree to give the life insurance benefit to your lender if you died during the term.

Any policy benefit left over after paying off the mortgage goes to your estate. If your total life insurance benefit is used to pay off your mortgage when you die, there will be no cash lump sum available for your dependants. So, it is generally better to have separate mortgage protection and life insurance.

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