Mortgage Protection Explained: Life, Illness and Income Cover

What "mortgage protection" actually means

There is no single product called mortgage protection. The phrase is used for several different types of cover, each dealing with a different risk:

| Risk | Cover usually linked to it | How it pays | |---|---|---| | Death | Life insurance (level or decreasing term) | A lump sum | | Serious illness | Critical illness cover | A lump sum | | Being unable to work through illness or injury | Income protection | A monthly amount | | Accident, sickness or unemployment for a short period | Mortgage payment protection insurance | A monthly amount, for a limited time |

Understanding which risk each one covers matters more than the label.

Is it a requirement for a mortgage?

No. MoneyHelper is clear that life insurance is not a legal requirement when you get a mortgage. Lenders usually require buildings insurance, but life and income cover are separate decisions. Some lenders or brokers offer cover alongside a mortgage, and you don't have to take it from them.

Life insurance: level or decreasing term?

• Decreasing term cover falls each year, broadly in line with the balance of a repayment mortgage. It is usually cheaper, because the amount it pays shrinks over time.
• Level term cover pays the same amount whenever a claim is made during the term. It can cover an interest-only mortgage, where the balance doesn't fall, or leave money over for other needs.

A joint policy is usually cheaper than two single policies, but it pays out only once, on the first death. Life insurance explained covers terms, joint policies and trusts in more detail.

Critical illness cover

Critical illness cover pays a lump sum if you are diagnosed with one of the conditions listed in the policy, which could be used to reduce or clear the mortgage. It is often added to a life policy. What counts as a claim depends on the policy definitions, so they are worth reading. See critical illness cover explained.

Income protection

Income protection pays a proportion of your income each month if illness or injury stops you working, after a waiting period you choose, and can continue until you return to work, retire or the policy ends. It isn't tied to the mortgage, so it can also cover bills and living costs. Income protection explained explains deferred periods and how it fits with sick pay.

Mortgage payment protection insurance (MPPI)

MPPI is short-term cover designed to meet mortgage payments, and some versions include unemployment. MoneyHelper notes that:

• payments typically last up to 12 months;
• there is usually a gap of about three months before payments start;
• redundancy that was already announced or rumoured when the policy started is excluded, and voluntary redundancy usually is too;
• part-time, self-employed and temporary workers are often not covered.

It differs from income protection, which replaces part of your income rather than paying the lender, and which usually can't pay out for job loss.

What the state may provide

Support for Mortgage Interest is help with mortgage interest for people claiming certain means-tested benefits. It is paid as a loan, repaid with interest when the home is sold or transferred, so it is not a replacement for protection.

Questions worth asking

• Who would struggle to pay the mortgage if you died, became seriously ill or couldn't work?
• What do your employer's sick pay and any death-in-service benefit already provide?
• Is the mortgage repayment or interest-only, and how long is left?
• Would the household need a lump sum, a monthly income, or both?
• What existing cover do you have, and does it still match the mortgage?