Just as its name suggests, mortgage payment insurance is designed to provide financial security against the risk of a person suddenly losing their income due to incapacity or unemployment. Mortgage payment protection insurance (MPPI) provides a monthly tax free sum which enables the policy holder to continue to meet their mortgage repayments.
Certainly, those sudden and unexpected mishaps which can lead to injuries serious enough to keep the policy holder off work for a month or more, or involuntary redundancy, can happen to anyone. And since this can frequently lead to the loss of a normally earned income, the insurance acts by paying out a regular monthly benefit so that the mortgage can be paid.
Different levels of cover
In the overwhelming majority of cases, mortgage payment insurance will automatically be a package that covers two major events - incapacity (ie accident or sickness) and involuntary redundancy.
However, the policy holder can elect to have just accident and sickness insurance only or just unemployment cover only, if that suits their circumstances better.
For example, countless working days are lost in the UK each year through employees' sickness and ill-health. For some of the luckier ones, such enforced absences from work might be covered by an employer's in-house sick-pay scheme; for many others, however, the absence will lead to a loss of income and the financial difficulties that will follow in its wake. In this instance, accident and sickness insurance will help reduce any financial difficulties to the minimum.
Statutory sick pay
Statutory sick pay, of course, is an entitlement enjoyed by anyone working under a contract of service in the UK. At its current standard rate of less than £76 a week, however, few people would find that it offers adequate financial support in the event of an illness that lasts a month or more and it is certainly less than could be affordably provided by an individual sickness insurance policy.
Similarly, State benefits for those people who become unemployed are only paid out after the applicant for benefits has met strict criteria. And even then the amount they will receive will be unlikely to meet all their mortgage repayment costs.
You may feel that if you were made redundant that you could survive off any severance pay, but would this really be a financially viable option?
It is important that any potential purchaser of mortgage cover weighs up the pros and cons of the level of cover they are considering as well as look in to what their employer offers in respect of being off work due to an accident, for example, to ensure that there is no duplication of cover.
How much mortgage cover?
The typical maximum amount that can be insured under a payment protection insurance policy is equal to 50% of the policy holder's normally earned income or £1,500 a month, whichever is less. This should be enough income for the average householder to ensure that their mortgage repayments are still met while they are recovering or seeking new employment.
Remember, however, that these limits are likely to vary from mortgage payment insurance provider to another, so it is important to establish what they are for the preferred insurer.
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