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Mortgage insurance products

We give you the lowdown on the insurance products available to mortgage borrowers

Mortgage Payment Protection Insurance (MPPI) - cost: from £3.50 per £100 of monthly repayment

Homeowners out of work - even with a perfectly bona fide excuse such as redundancy, accident or illness - can’t rely on state help with their mortgage payments. If a borrower’s income dries up the Government will pay just the interest on the first £100,000 of a home loan and only after they’ve been out of work for nine months. It won’t help full-stop if you have £8,000 in savings or live with a partner with a full-time job. Forty per cent of new home buyers take out Mortgage Payment Protection Insurance (MPPI), which will take care of your mortgage if you’re made redundant or prevented from working by an accident, illness or injury.

It’s cheap and simple, costing an average of £4.95 per £100 of mortgage payment. But it’s regrettably short-term. It only pays out for 12 months and not, like many assume, until the policy holder finds another job. It also tends to be more geared for borrowers who’ve suffered redundancy. It could be limiting if you’re suffering with stress, or a muscle-related injury such as a bad back - the most common reasons for people being unable to work.

Income Protection - cost: from £20 a month, but fluctuates wildly

Income protection, on the other hand, provides long-term protection against any illness illness, accident or injury that keeps a policy-holder out of employment. What it won’t include, unlike MPPI, is cover against redundancy. A income protection policy offers great peace of mind. It promises to provide a good portion of your monthly salary (up to 60 per cent tax-free) until you are fit to return to work or the policy ends. In theory, it could pay out up to retirement age. The catch is the cost, which will be more than most insurance deals. A host of factors can also effect the price. Smoking doubles premiums. People with high pressure jobs such as teachers and police (stress-related illnesses are the fastest growing type of claim) can expect to pay over the odds as can policy holders with physically demanding jobs such as builders (muscle-related injuries account for most claims). Women also pay more. They live longer than men but tend to live unhealthier lives and make more claims. Deferment periods (the number of days between stopping work and receiving pay-out) also effect the cost.

Those you want a pay out to start close to the period when they can’t work will have higher premiums than those opting for a longer period before receiving a claim. deferments of up to two years are possible. MPPI on the whole kicks in after 30 days. As the self-employed and contract workers don’t enjoy company benefits such as sick pay, they tend to opt for lower deferment periods and therefore pay slightly more.

Critical Illness cover - cost: £12-14 a month

Similar to income protection is critical illness cover. This has nothing to do with being out of work. Instead, critical illness protection guarantees a lump sum pay out if you’re diagnosed with a life-threatening condition such as cancer or heart disease. Critical illness policies work by listing a number of medical conditions. If you’re diagnosed with any of them you’ll be given your pay out, which you can use to settle your outstanding mortgage balance. The fewer the conditions listed in a policy, the cheaper the premiums. The minimum number is eight. All policies cover the ‘big three’; cancer, heart attack and stroke. Premiums rise with the number of conditions outlined. It’s possible to protect yourself against as many as 40 conditions. Other factors effect the price of critical illness cover. Family history is crucial. If your close relatives had cancer you’re deemed more likely than most to develop it yourself so will face dearer premiums. Just like with income protection, women pay more than men and lifestyle comes into play. Smokers and drinkers face higher premiums and, increasingly, obese policy holders. If you’re overweight you’re more at risk from strokes, diabetes and heart disease. One insurer claims obesity knocks eight years off the typical life span. Gay homeowners are also often charged higher premiums as insurers consider them to be at a higher risk from HIV and AIDS, which are excluded from critical illness policies. But remember critical illness policies are geared toward specific serious illnesses - not for far more frequent conditions that rule people out of the job market. If you want a policy to cough-up in case of muscle-injuries or a stress-related illness then income protection insurance is the answer.

Life Insurance - cost: from £6 a month for £100,000 of mortgage

Critical illness protection is arguably more important than life cover. We are more likely to suffer a deadly
illness before we reach 60 than actually die, for example. But death doesn’t pay all debts and mortgage
borrowers, while it is not compulsory, are strongly advised to take out life insurance. Borrowers who live
alone and have no dependants don’t need it. But it forces most homeowners to ask themselves some very grown up questions. If you die, who’ll pay the mortgage? Could your spouse, partner, children possibly, afford the monthly payments if you pass away? Life cover, will give you, and you and your partner in the case of a joint plan, the confidence that should you die your home loan will continue to be paid and any dependants won’t have to cope with the added blow of, at worse, losing a home. Life insurance cover is very straightforward. You pay a premium every month and if you pass away the mortgage will be taken care of. At best, it will set you back under £20 a month. You’ll have to fork out nearly twice that if you smoke. Older policy holders can also expect to pay more. Insurance providers regularly complain that too many homeowners are without life cover - usually as it’s seen as an unnecessary extra expense. Peter Hamilton, head of protection at Friends Provident, says: "Most people are happy to insure their house, its contents, their car, travel plans or mobile phone, but often give little thought to insuring the income that pays their mortgage and funds their lifestyle. Death, long term sickness and disability are subjects that most of us would rather avoid discussing.”

He adds: "Life assurance cannot lessen the emotional impact of such events but it can soften the financial difficulties should the worst happen." There are exclusions to be aware of. Life insurance won’t pay up, for instance, if the policy-holder commits suicide or died due to drug or alcohol abuse.

Buildings and contents insurance - average cost £200 a year

Buildings cover is the only one among of host insurance offerings that homeowners must have. Without it your mortgage lender won’t approve your home loan. Buildings insurance covers the cost of rebuilding or repairing your home should it be destroyed by fire, flood or any other of Mother Nature’s retributions. Without it, a disaster like this could leave you homeless. It is not hugely expensive and costs the average customer £200 a year, according to the Association of British Insurers (ABI). The easiest way to arrange cover your new home through your mortgage lender. But if you do it this you’ll be paying through the nose. If go to the bother of shopping round on the internet it’s estimated you could save as much as 40 per cent. Many factors determine monthly premiums such as building labour costs in your area and the age and property type. But environmental factors are most important. If the home is in a post code more prone to floods or subsidence, buildings cover will be dearer. Make sure you check exactly what you are and what are not covered for. A policy will usually cover damage or ruin to greenhouses, garden sheds and accidental damage. But it won’t necessarily include damage to boundary walls, fences, gates, paths, drives and swimming pools. Neither are you covered if your home
is blighted by frost, damp and dry rot. You can arrange extensions for a policy but the price will rise.

Buildings insurance will also cover for damage to permanent fitted fixtures such as baths, fitted kitchens and toilets, inside your home. You’ll need to tell your insurer about extensions, such as a conservatory, to insure these will be covered. You might go on to insure the contents of your new home. It is not mandatory to insure your possessions and one in four, or six million homeowners, don’t bother. Maybe they are put off by the extra expense. The Association of British Insurers says it usually costs around £120 a year. But that figure doubles with accidental damage cover (most possessions are ruined or destroyed by accident). But you may decide it’s worth your while to prepare for the trauma of treasured items being destroyed or stolen. The contents of typical home are estimated to be worth as much as £44,500. Just like with buildings contents, you may be surprised at what’s not covered in your contents insurance. Policies won’t often cover the belongings you use outside the home. These can be particularly valuable possessions such as jewellery, lap tops, iPods and mobiles. There is also often a single-item limit of £1,000 and an overall limit of £10,000 for all your valuables. Limits, though, can be increased in return for higher premiums. The biggest factors determining the price of contents insurance, are the security and location of your property. Your past claims history, age and occupation also come into play. There’s often a fine line between what’s classed under contents or buildings insurance (Curtains and carpets, are fitted but can also be removed, for example). You can get buildings and contents insurance together at a discount.


This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd

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