Your mortgage is probably your biggest monthly outgoing. If you were unable to work due to illness or redundancy, you'd still need to make your repayments or you'd risk losing your home.
There are two main options for protecting yourself: you can either take out protection insurance specifically to cover your mortgage payments or get general income protection insurance (where the payments you would receive could be used for anything).
Here we focus on mortgage protection insurance, but you can read more about income protection insurance in our comprehensive guide.
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What is mortgage protection insurance?
Mortgage protection insurance (also known as 'mortgage payment protection insurance' or simply 'mortgage insurance') allows you to continue paying off your mortgage if you are no longer receiving a secure income.
Generally speaking, there are three types of mortgage protection insurance: ‘unemployment only’, ‘accident and sickness only’, and ‘accident, sickness and unemployment’.
How much does mortgage insurance cost?
The table below shows indicative costs for accident, sickness and unemployment mortgage insurance for someone earning the average UK salary (£26,780) and paying an average UK mortgage (£650) every month.
Mortgage insurance costs will vary based on factors such as your age and the cost of your mortgage repayments.
For obvious reasons, accident, sickness and unemployment mortgage protection insurance is more expensive than unemployment only or accident and sickness only policies.
Monthly mortgage protection insurance costs for an accident, sickness and unemployment policy
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Table notes: Quotes gathered from moneysupermarket.com on 27 March 2018 using ‘accountant’ as the occupation; results based on quotes from 15 providers. Policies include a 60-day waiting period. Average UK salary sourced from the Office for National Statistics Family Spending 2017 survey. Average monthly mortgage payment sourced from December 2017 UK Finance Regulated Mortgage Survey.
How much does the insurer pay out if I claim?
Insurers will pay you a set amount each month, typically for a period of up to two years.
Depending on the provider, you may be able to choose how your policy will pay out. For example, you might want the policy just to cover the cost of your mortgage payments, or you may want it to cover the cost of other bills too. If you opt for the latter, providers will typically pay out 125% of your mortgage costs.
You can also choose to base the cover on your salary. Providers will typically pay out up to 50% of your monthly salary.
How long must I wait before I claim?
Before claiming, you will need to be off work for a specified number of days. This is known as the waiting period, or excess period, and it can range from 30-180 days.
The longer the waiting period, the cheaper the policy is likely to be - so if your employer offers sickness benefits, or you have some savings you could rely on for a few months, you may want to take out a policy with a longer waiting period.
Mortgage protection insurance FAQs
Will my job affect how much I pay?
Your job or the type of employment contract you have may affect the policy you can get. Most insurers will categorise jobs in different risk categories. Below is an example of how insurers may classify your job’s risk level, with Class 4 being the highest risk.
- Class 1: Professionals; managers; administrative staff; staff with limited business mileage; admin clerks; computer programmers; secretaries.
- Class 2: Some workers with high business mileage; skilled manual workers; engineers; florists; shop assistants
- Class 3: Skilled manual workers and some semi-skilled workers; care workers; plumbers; teachers
- Class 4: Heavy manual workers and some unskilled workers; bartenders; construction workers; mechanics
Most providers will now cater for self-employed people, but read the small print carefully to check you're not exempt - for example, if you're on a casual or fixed-term contract.
What is an exclusion period?
It’s highly unlikely that your mortgage insurance policy will cover you from the moment you take out the policy - in fact, it may be a few months before you're able to claim. The time between your policy beginning and you being able to claim is known as the exclusion period (or buffer period), and these can vary from 30-180 days.
Unemployment cover is likely to have a longer exclusion period than accident or sickness cover. This is to stop people who know they are going to be made redundant from taking out policies.
What is a ‘back-to-day-one’ policy?
Despite most policies paying you from when you claim, it’s also possible to get policies that will pay out from the first day you're off work. These are known as 'back-to-day-one' policies. They will typically be more expensive than policies with a waiting period.
All policies will pay you in arrears, though - so whether or not there is a waiting period, you will receive your first payment one month after your claim is accepted.
What if I have a pre-existing medical condition?
If you’ve experienced health problems in the past 12 months, this is likely to affect your ability to get mortgage protection insurance. Some policies will provide no cover at all for pre-existing medical conditions, whereas others have strict criteria. For example, you won't normally be able to claim for time off due to a pre-existing condition if it recurs within 12 or 24 months (depending on the policy) of taking out mortgage insurance.
Also, if you have an issue with your back, you may find it tricky to claim - you may need to provide radiological evidence before your insurer will pay out.
There will be other medical exclusions and conditions, too, which you should check carefully before taking out a policy.
I am taking time off for mental health issues – can I claim?
Despite mental health being a common reason for needing time off work, you may have some difficulty claiming on your policy and insurers may require you to provide evidence that your mental health means you cannot work.
Is mortgage protection insurance the same as PPI?
Although they may sound similar, mortgage protection insurance is not the same as payment protection insurance (PPI). While PPI covers unsecured finance and payments are made to the lender, mortgage protection insurance only covers mortgage payments and is paid directly to you.
What are the alternatives to mortgage protection insurance?
Before you take out a mortgage protection policy, it's worth thinking about whether other forms of insurance may be better suited to your needs.
Income protection pays around 50% of your salary if you can’t work because of an accident or sickness. It will pay out for a longer period than mortgage insurance, for example until you can go back to work or reach retirement.
The downside to this kind of insurance is that it doesn't cover redundancy.
Income protection is a more effective way of insuring against ill health than mortgage protection insurance, as you're medically assessed when taking out the policy and will know in advance what you will and won’t be covered for. However, it also tends to be more expensive than mortgage protection insurance.
Find out more: income protection
Critical illness cover
Critical illness insurance pays a lump sum if you're diagnosed with a serious illness, but it will not provide a regular income.
Find out more: critical illness cover
Life insurance is not really an alternative to mortgage protection but is worth considering if you have dependents as it will pay out a lump sum in the event of your death. You can opt for the lump sum to be enough to cover the cost of your total outstanding mortgage debt.
- Which? Mortgage Advisers recommends using LifeSearch to find the right life insurance. For more information you can call 0800 197 8461.
Before you take out any new protection insurance, check whether there are any arrangements already in place with your employer.
Some companies will continue to pay your salary, or a proportion of it, for a set period if you need to take time off owing to illness.
You may also be covered by protection insurance from your employer.
If you become unemployed you may be able to get state benefits, such as jobseeker's allowance or employment and support allowance.
If you're eligible for these benefits, you may also be able to apply for the Support for Mortgage Interest scheme (SMI). Under the scheme, your lender will receive payments from the government covering all or part of the interest on the first £200,000 of your mortgage at the Bank of England’s published monthly average mortgage interest rate.
These payments will not cover your capital repayments and will only be paid for up to two years if you're claiming in addition to income-related jobseeker's allowance. Visit gov.uk for more information.
Expert mortgage advice
Working out how much you need to save can be confusing. For tailored advice based on your personal circumstances, you can speak to Which? Mortgage Advisers.
Your home may be repossessed if you do not keep up your mortgage repayments.