What is Mortgage Protection?
Mortgage protection insurance is an insurance policy that pays off your mortgage if you or another policy holder dies during the term of the mortgage. If you have a joint mortgage, both people need mortgage protection insurance. It 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. By law, your lender must ensure you have this cover in place when you take out a mortgage.
- However, a lender may agree to give you a mortgage without this cover if:
- You are buying an investment property
- You are over 50 years old
- You cannot get this insurance, for example due to a current serious illness, health issue or dangerous occupation
- You have a life insurance policy in place already
- Exemptions are made on a case by case basis and even if you fall within one of the above exemptions the lender may make it a condition of the mortgage that you have mortgage protection in place before they approve your mortgage.
It is important to know the financial risk of having no cover in place before signing up to the mortgage. In the event of death, there will be no insurance policy to pay off the mortgage so the joint owner or your beneficiaries will have to continue to repay the mortgage.
Are There are different Types of Mortgage Protection Policies?
Decreasing Term
As you pay more off your mortgage, the amount that the policy covers reduces in line with the outstanding balance of your mortgage. Under normal circumstances the policy will end once the mortgage is paid off. It is the most common and the cheapest form of mortgage protection. Generally, your premium does not change, although the level of cover reduces.
Level Term
The amount you are insured for and the premium you pay remains level. This gives you the same amount of cover throughout the term of the mortgage. If you die before your mortgage is paid off, the insurance company will pay out the original insured amount. This will pay off the mortgage and any remaining balance will go to your estate.
Use an existing Life Insurance policy
You can use an existing life insurance policy as long as it is not already pledged or assigned to cover another loan or mortgage and it provides enough cover. Additionally, if there is a balance remaining after the mortgage is clear, this will go to your estate. This may be a handy option if you are unable to get a new policy because of medical underwriting issues.
Serious Illness Cover
If you wish to, you can add Serious Illness Cover to your mortgage protection policy. This means your mortgage will be cleared not only if you die, but also if you are diagnosed with, and recover from, a serious illness that is covered by your policy. Serious illnesses typically covered include, but not limited to, stroke, heart attack and some types of cancer.
Although it should be noted that these three illnesses account for around 80% of claims. Serious Illness Cover is more expensive than other types of cover.
Adding Serious Illness Cover to a mortgage protection policy has a number of drawbacks. Most Mortgage Protection policies include Serious Illness Cover on an Accelerated basis where it is implied that the funds will be applied to the mortgage. However, things get trickier if the cover is set up on a Stand-Alone basis. This may be the case where an existing policy is assigned or if the cover is set up on a level term basis.
Depending on the policy terms and conditions it may be impossible to get the lender to agree to pay the SIC benefits directly to you. If the SIC is set up on a stand-alone basis as part of a level term policy then it is not assigned to the lender. However, many lenders insist on applying the cover against the mortgage in the first instance when it may be more beneficial for the client to receive the funds directly especially if mortgage repayments are up to date and likely to be maintained. The last thing you need if you or a loved one is diagnosed with a serious illness is to get involved in a row with the lender over the serious illness cover benefits.
An example: John and Mary have a Level term Mortgage Protection policy with €300,000 Life Cover and €100,000 SIC arranged on a Stand Alone basis. Unfortunately, Mary is diagnosed with a Serious Illness and a valid claim is paid. John continues working and continues to make the monthly mortgage payments. The policy is assigned to the couples lender and the lender has indicated that they will receive the €100,000 SIC and reduce the mortgage accordingly.
John and Mary could use the money to pay down up to €100,000 of the loan or they could use it to eliminate other higher cost debt, modify their home to improve Mary's quality of life, use it to seek additional medical help or maybe even just book a holiday. The point here is that it may have made more sense to set up a Decreasing Term Mortgage Protection policy on day one and arrange a separate Serious Illness plan.
It should be noted that it is not normally a requirement to assign serious illness cover as part of the loan application process. No matter what the bank says.
Accelerated Serious Illness Cover
Accelerated serious illness cover is usually available as an optional benefit that can be purchased as part of a life insurance policy. If it is added to a policy, then the sum insured is payable on death or earlier if the life assured is diagnosed with a serious illness covered by the policy.
Stand-alone Serious Illness Cover
Stand-alone Serious Illness Cover is arranged as a separate entity to the Life Insurance and as the name suggests it stands alone. This type of Serious Illness Cover is sometimes referred to as Independent Cover. In the event of a claim, the benefit paid does not affect the Life Cover. Known as a living benefit the proceeds are paid once the life assured survives 14 days following a diagnosis of a specified serious illness set out in the policy documents.
Where is the Best place to get mortgage protection insurance?
Mortgage Lenders
Most mortgage lenders offer to arrange mortgage protection insurance for you when you apply for a mortgage. It may be convenient for you to arrange your mortgage protection insurance through your lender as you can pay your premium as part of your mortgage repayments. However, you should always shop around for a policy. It is important when shopping around that you compare both cover and price. A policy may appear cheaper on the surface but not have as much cover as another, slightly more expensive one. Be aware that if you buy a policy through your lender, you may be under the lender’s group policy. This may restrict you if you want to switch your mortgage later on.
Financial or Mortgage Brokers
You may wish to use a financial or mortgage broker to arrange your mortgage protection insurance. Brokers usually compare a number of policies from different providers to make sure that you get the policy to suit your current needs and also the best deal. Brokers will also make sure you are fully aware of any differences in cover between each option. Brokers may charge a fee for their services or receive a commission from the first year’s premium paid on the policy.
Use an existing policy
You can use an existing life insurance policy for mortgage protection, as long as the amount you are insured for is at least equal to the value of 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 to pay off your mortgage if you die during the term. Any policy benefit left over after paying off the mortgage goes to your dependants.
What happens to my policy if I change my mortgage?
If you are changing your mortgage there are a number of things to consider, depending on whether you are topping up or extending your mortgage, switching or paying the mortgage off early. Topping up your mortgage If you are topping up your mortgage, you will need to make sure that your policy meets the new value of 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 and then buy a second policy for the top-up amount.
Check the cost of cancelling the original policy and replacing it with a policy for the full amount of your 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.
When switching your mortgage you will assign your mortgage protection to the new lender. The premium and level of cover will be the same as before, as long as the amount you borrow and the term of your mortgage does not change. If either the amount you borrow or the terms of the mortgage change, you may need to increase your mortgage protection cover to ensure that you are still fully protected. You may be able to increase the cover on your existing policy.
If this is not possible and you need to take out a new policy, it may cost more as you are now older and you may not get cover at all if you are not in good health.
If you have a policy through your lender’s group scheme, your lender will cancel the policy when you switch your mortgage. Before you switch your mortgage, make sure that you can get mortgage protection insurance as it will cost more as you are older and if you are not in good health you may not get cover at all.
What happens if I Pay off your mortgage early?
If you are in a position to pay off your mortgage early then you generally have two options.
You can cancel your mortgage protection cover and pay no more, or keep the policy and continue paying until the original end date. You might choose to keep the policy and continue to pay if you have a policy that covers more than just your mortgage, for example life insurance or level term cover.
Cancelling your mortgage protection
If you decide to cancel the mortgage protection cover, always check with the insurance company that the policy has been cancelled. If the policy is not cancelled correctly, payments may still be taken from your account. If the policy has been arranged through your lender, your lender will cancel the policy on your behalf but you should check to make sure this has been done. If the policy has not been cancelled by your lender, ask the insurance company what your lender needs to do to make sure the policy is cancelled and no more payments are taken from you.
Make sure that if you have been paying by direct debit, that you cancel the direct debit in writing.
Keeping the policy
If you decide to keep paying into the policy after paying off the mortgage, you will still be covered by the policy in full up until its expiry. If you die before the policy finishes, it would no longer need to be used to clear your mortgage. So any benefit would be paid to your dependants/estate. If you have a group policy with your lender, they may close off the policy once the mortgage is cleared. There may be no option to keep the policy open.
Important note:
If you decide to keep your policy make sure that the lender signs a Deed of Release and that you get a copy of the deed. If a Deed of Release is not provide to the insurer they may pay the claim directly to the lender. If this happens then the client will have to get the money from the lender. Good luck with that.
Making a mortgage protection claim
Making a mortgage protection claim involves some paperwork. There are a number of basic steps you should follow:
- Contact your insurer or broker: you will need to notify your insurer or broker that the policyholder or one of the policyholders in the case of a joint life policy, is deceased. As a mortgage protection policy is assigned to your lender, usually your bank, the balance on the policy will be paid directly to the lender.
- Complete a claims form: you will need to submit a claims form to your insurer when making a claim. Remember to complete the forms as accurately as possible to avoid delays or refusal or your claim. If you are unsure of any information requested on the form, contact the insurer or broker.
- Get your paperwork in order: your insurer may ask for documentation such as the original policy document, certified copies of the death certificate and will if available. The insurer or broker will advise what documentation is required during the initial contact.