Mortgage Payment Protection Information

Tuesday, December 02, 2008

Any payouts from accident, sickness or unemployment (ASU) or mortgage payment protection insurance (MPPI) may jeopardise any state benefits for which you may be eligible. You will not be able to make an insurance claim if you knew you were about to lose your job prior to taking out the policy.

The state pays income support for mortgage interest (ISMI), which covers the interest part of your mortgage. However, you won't get ISMI for nine months after losing your job, if you took out your mortgage after 2 October, 1995.

Those who took out their mortgage before then may qualify for the more generous ISMI regime, which kicks in two months after you lose your job, pays 50% of your mortgage interest for four months, then the full 100%.

With both ISMI schemes you can only get assistance on a mortgage up to the value of £100,000. The rate of interest you claim changes as the Bank base rate* moves.

Critical illness cover

You are more likely to suffer from a critical illness than die during your mortgage term - one in three people in the UK have cancer diagnosed at some point in their life, while someone suffers a heart attack every three minutes. If you have a critical illness and are unable to work, how would you pay your mortgage?

Critical illness policies pay a lump sum if you suffer from a specified critical illness such as a heart attack or various forms of cancer. The policies can be taken out by an individual or by a couple over the term of the mortgage.

A single 30-year-old person would pay about £2.50 a month for every £10,000 of mortgage cover - so to cover a £60,000 mortgage would set you back £15 a month.

It's cheaper to add on critical illness cover to a life insurance policy just because there is one policy rather than two - the saving works out at about 10%.

The Association of British Insurers has published a guide to the core illnesses these policies should cover and their definitions to help consumers choose which is the best one for them. The core conditions are cancer, coronary artery bypass surgery, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke.

There is also a list of additional conditions, but not all insurers cover you for them - they include brain tumour, Parkinson's disease and paralysis.

However, look out for certain exclusions, such as arthritis. Also, your policy is unlikely to pay out if your illness is believed to be self-induced, so if you suffered liver failure from drinking too much, for example, you won't be covered.

You have to disclose fully any pre-existing conditions upfront to your insurer. Otherwise, they may turn down your claim. There is no payment on death on a stand-alone plan and often no payment if death occurs within 28 days of a condition occurring.

Term assurance

MANY homeowners may have converted an interest-only mortgage into a capital repayment mortgage and cashed in their endowment policy in the process. However, the endowment policy provides life cover if you die and will pay off your remaining mortgage debt.

So if you now have a repayment mortgage, you need to make sure you have adequate life cover so that any dependants are not saddled with debt on your death. If you have no dependants, life cover is not an issue.

Term assurance is basic life insurance which provides cover for a certain period of time. It can be taken out for 20 or 25 years to cover the term of your mortgage.

The policy will pay out upon the death of the borrower. For joint borrowers policies usually pay out if the first borrower dies. Policies can be level term or decreasing term. Level means the amount the policy will pay out remains constant throughout the term of the cover. This would be used for an interest-only mortgage, when capital is not paid back each month.

Borrowers with repayment mortgages could opt for decreasing term assurance to keep monthly premiums down. Because the amount of debt on a repayment mortgage is being reduced, the level of cover decreases and your premiums are lower throughout.

Term assurance is relatively cheap. For example, a 30-year-old non-smoking man who has level term assurance on a 25-year £60,000 mortgage would pay about £6.50 a month. For a joint life policy this works out at around £8.50 a month.

Kevin Pepler, 25, and his partner Davina Preston, 22, aren't taking any chances and have taken out decreasing term assurance and critical illness cover with Scottish Provident. The couple, from Bath, have an £85,000 mortgage with Nationwide and wanted to make sure they had adequate protection.

Kevin, a panel beater, says: 'We just didn't want to leave each other with a huge debt should something happen to one of us. We want to make sure we are stable for the rest of our lives and don't have to worry about paying off the mortgage in times of trouble.'

The Scottish Provident Self Assurance policy appealed to them because it is an all-in-one policy which has a menu of up to six types of cover, including death benefit and disability income. However, Scottish Provident policies can be bought only via independent financial advisers. The couple pay £26 a month for their combined term assurance and critical illness cover.

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