What is mortgage protection insurance?

Protection policies pay if you get seriously ill or die, and are commonly sold in combination with a mortgage.

There are three main types of mortgage protection insurance.

Income protection

With income protection the insurer covers some or all of your regular income if you are too ill to work. 

This naturally compliments a home loan because it’s designed to cover regular commitments like mortgage payments. It pays for a set amount of time or until you are fit to work again.

Critical illness cover

Secondly there’s ‘critical illness cover’, which also pays if you fall seriously ill. 

This differs from income protection by paying in the form of a lump sum. The amount is established when taking out the policy.

Keep in mind that the definition of critical illness can differ amongst providers, so check terms and conditions prior to committing to a provider.

Life insurance

The third option to complement your mortgage is ‘life insurance’, where there’s a payout to your beneficiaries or family if you die, to ensure they are given financial security if you are no longer around to support them. 

There are two main types of life insurance policy: ‘term life insurance’, which protects you for a set amount of years; and ‘whole of life insurance’, that lasts until you die.

Term life insurance can come in the form of level and decreasing, where decreasing term insurance is best suited to a repayment mortgage as the level of cover will reduce in line with the remaining mortgage balance.

Whole life insurance will, naturally, cost a lot more, as there’s a guaranteed payout at the time of death.

It should be stressed that none of these products have anything to do with the infamous ‘mortgage payment protection insurance’, which was commonly mis-sold alongside mortgages before the global financial crisis.

Do I need mortgage protection insurance?

Other than Buildings Insurance, which lenders require you to have, other forms of protection insurance are not compulsory. However, many who work in mortgages feel strongly that more people should protect themselves than actually do.

The industry deems it best practice to bring up your protection needs, so mortgage advisers may ask you about whether you’ve considered insurance when you get a mortgage.

In the event that something goes wrong and the broker is accused of not mentioning it, some brokers may ask customers to sign a disclosure saying they didn’t want mortgage protection insurance when offered it. 

The challenge for advisers is that there’s a tendency for people to think ‘it’ll never happen to me’, as nobody wants to consider the possibility that they could fall ill or die. Clearly the latter isn’t a positive thought, so it’s harder to talk about protection than securing finance to buy your own home.

Start anywhere anytime

Where can I get mortgage protection insurance?

When seeking out mortgage protection insurance it’s best to speak to a specialist broker or independent financial adviser.

Advisers are generally best placed to compare the deals on the market, find which form of mortgage protection insurance you need and ensure the policy would pay out if it comes to that.

If you go direct to a mortgage lender they may also have partnerships with insurance brokers or providers, so you can check with them.

How much is mortgage protection insurance?

The premiums on mortgage protection insurance depend on a number of factors.

Income protection can be as little as £10 a month, though most people pay more than £50 a month.¹

How much you pay depends on:

  • How much income you are covering

  • How long the policy runs for – it can run for a ‘term’ of a few years or be a ‘whole of life’ policy

  • The deferral period – how long you can wait before the insurance starts paying after you’re not working

  • Indexation – whether the money you receive rises with inflation

  • (with income protection) How long the policy will pay out for after claiming

If the cost of your policy stays the same over time, it’s known as ‘guaranteed premiums’. 

You can also take out policies where the amount of money you pay changes over time. 

You can have ‘reviewable premiums’, where the insurer can change its terms. Meanwhile you can also have policies that become more expensive as you get older, called ‘age banded premiums’.

Health and lifestyle

When assessing the cost of the policy, insurers analyse your health and lifestyle.

Effectively the younger and healthier you are the cheaper the policy will be, because you are less likely to make a claim in the foreseeable future.

Smoking makes policies much more expensive owing to its impact on your health. Indeed, if you go smoke-free for a year that could halve the cost of an income protection policy.²

The older you are the more premiums will cost, while if you have pre-existing health conditions the policy will either be more expensive or exclude those conditions.

Your occupation is also taken into account. If you are a manual worker in heavy machinery for example you are likely to be seen as higher risk than if you work in an office.

How much will the insurer pay out?

Income protection policies cover some or all of your annual salary, with some insurers allowing you to cover up to 70%.³

With life insurance most insurance companies allow you to cover a proportion of your annual salary, whether 6x, 10x, 15x, or 20x.

Of course, the more you cover the more the policy will cost. 

The typical payouts in 2018:

  • £70,925.83 for critical illness cover 

  • £81,268.78 for term life insurance

  • £4,740.14 for whole of life insurance 

  • £22,058.45 for income protection⁴

There’s a misconception that insurers often don’t pay out on claims, but the reality is very different. 

Indeed, in 2018 97.6% of protection claims were paid, so providing you take out the right policy there’s no reason to think will be rejected when claiming on your policy.³

Mortgage offer

Can I renew or switch my insurance policy?

Renewing or switching a policy

If you hold a protection policy it may be worth renewing or switching after a few years. 

This is especially the case if you’ve made some positive lifestyle changes, such as giving up smoking, or it could simply be that the market has become more competitive. Either way these are things to discuss with an adviser.

You need to be careful as you get older however, as policies will likely become more restrictive as your health declines. In some cases it may be best to stick with the policy you took out when you were younger and seen as less of a risk.

Speak to a specialist

We recommend you speak to an adviser if you want more information about protection insurance, or if you are one of the many unprotected households in the UK. A specialist will be able to determine which form of protection works best for you.

Further resources

Apply with Trussle today

  • Fee-free online mortgage broker

  • Rated 4.9/5 on Trustpilot

  • Thousands of deals from 90 lenders

  • Straightforward online application process

  • No waiting for appointments

  • No paperwork

  • Free ongoing mortgage monitoring

Your home could be repossessed if you don't keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Trussle holding phone icon

What people are saying about Trussle...