What is it?
Put simply, it’s life insurance that is designed to pay off the mortgage in the event of your death.
Lenders insist on this cover so that they can recover the money they lent you if you die before being able to pay off the loan.
There are 2 types of mortgage protection policies, namely, a group scheme offered by the bank and an individual life policy. It’s also important to know that you ultimately have the choice of which cover you go with, and this is protected by law.
Under the Consumer credit Act ,1995 the borrower is entitled to arrange individual mortgage protection cover with any life assurance company of their choice. The Lender can not force the borrower to take out the cover through them.
-A group scheme
This type of cover is offered by the bank that you’re taking out your mortgage with. It’s often said that people would sign just about anything when they’re trying to get a mortgage, and so most people take out the mortgage protection with their bank. But are they right to do so?! Often, the answer is no and here’s why;
If during the life of the mortgage, your health goes into decline, you may have a problem switching mortgage provider or trading up your home.
This is because the group scheme cover that is taken out with your bank is tied to your mortgage. If you need a new mortgage, you need new insurance. That means your current state of health may come in to play. And it need not be that you’re in poor health. If you’re in the middle of a medical investigation, e.g. getting a biopsy done, insurers will not cover you until all test results come back and all is ok.
Now, imagine that you want to put an offer in on a house and the seller needs to close in the next 2/3 months and you are waiting on an appointment for a biopsy. You may not be able to put an offer in because you can’t get the borrowing in place because the insurers wont cover you.
-An individual Life policy
This type of cover is offered by insurance companies. You can take out a mortgage protection policy with them, which you would then assign to your bank. This means that whilst you own the policy, the bank are the ones that get paid in the event of your death. If the sum you have insured is greater than what you owe the bank, your family (estate) will get the surplus funds.
This type of policy is portable, meaning that you can take it with you if you are switching mortgage provider and you won’t be subject to medical underwriting. There are usually optional extras that you can add to your policy that in return for a small increase in premium, give you greater flexibility in the future, namely;
Guaranteed insurability option: This allows you to increase the sum assured on the policy without any medical underwriting if you require a new larger mortgage. This means that no biopsy or medical decline would stand in the way of you moving home.
Protection continuation Option: This guarantees that you can extend the term of your cover without any medical underwriting. So if you need to re-mortgage your home in the future to pay it off over a longer term, your life insurance policy will allow you do so without any medical underwriting.
So why would anyone go with the banks group scheme?
I think if most people had sought financial advice prior to making their mortgage application they would not go with the banks group scheme. When signing a mortgage contract, you’re just handed the insurance contract and told to sign. People are nervous and don’t want to upset the applecart by questioning anything that they’re signing, they just want their house.
There are some benefits to the group scheme. Sometimes the cover is cheaper and the underwriting requirements are not as onerous.
There is also the risk that if you went into arrears in your mortgage, that your individual policy would have insufficient cover.
Or if mortgage interest rates went higher than what is assumed in your own life policy. Although, this is highly unlikely given the current interest rate environment.
Both of these risks are eliminated if you elect to take the guaranteed insurability option mentioned above.
Here’s the good news
You can switch from a group scheme to an individual policy at any time. This is subject to the usual underwriting procedures. So if you’re in good health today, getting a quote for your own mortgage protection cover is a worthwhile exercise.
If you would like a quote, this is something that I can provide. In fact, I can arrange the cover , take on the admin work and represent your interests. I am paid a commission for this type of work by the insurance companies and so I do not bill you a fee even though I’m working for you.
Thank you for taking the time to read this article. I hope you found it informative
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