Mortgage Payment Protection Insurance (MPPI) also referred to as Mortgage Protection Insurance (MPI) or Income Protection Insurance is an optional insurance to help you in the event that you cannot cover your mortgage repayments due to an accident or illness that prevents you from working, or if you are made redundant. It can be a useful option for those who do not have enough savings to cover an unexpected period of reduced income. In return for cover, you pay a monthly premium which varies between insurers.
In some cases, a lender may offer you MPPI, however in most of cases your lender is more likely to offer you lenders mortgage insurance and in a lot of cases only accept your mortgage application if you take out what they term mortgage insurance, however this type of insurance is not payment protection insurance it is lenders mortgage insurance and only protects the mortgage lender and not you as the borrower. So when dealing with your lender it is important you understand the difference in the terminology used as it can often lead to a grave misunderstanding for borrowers believing they are covered for MPPI when they actually are not. Both types of mortgage insurance can increase the cost of your mortgage, so you should think carefully about whether it is necessary for you and your situation. Many mortgage lenders will offer you their own Morgage Insurance cover when you apply for their mortgage so you need to understand what it is they are actually offering: although you are under no obligation to take out this insurance in some cases you may have no choice as unless you take out this type of insurance you may not be given the finance you are seeking. In most cases, mortgage payment protection insurance is offered by an independent provider and is cheaper and more comprehensive than that offered by your mortgage lender. In addition, remember that you can take out MPPI at any point during your mortgage term, which means you can shop around for the best deal before making a final decision.
MPPI from your lender usually covers you for sickness, accident and redundancy. The benefit of buying insurance from an independent provider is that you can tailor the policy to suit your situation. For example, if you are in a very stable job where you are unlikely to be made redundant, you may be able to remove redundancy cover in return for a lower premium. If you already have insurance that covers you in the event of redundancy, illness, or an accident that prevents you from working, but consider MPPI beneficial, ensure that you are not paying for duplicate cover. For example, if you already have private health insurance that covers the cost of illness, buying 'redundancy-only' MPPI cover can extend your protection at minimal cost.
Typically, the insurer will only pay out after thirty or sixty days, which means that you are usually required to fund at least one mortgage repayment yourself. Most policies only pay out for a maximum of twelve months: after this period, you must find alternative income to enable you to make repayments. If you already have savings that would cover twelve repayments, you may consider this insurance an unnecessary expense.
When Should You Take Out Mortgage Protection Insurance?
It is important to take out mortgage insurance early on, because this is when your mortgage will be the biggest and you will be the most extended – as you’re probably also providing for a young family at the same time. While you don’t want to think about what can go wrong - death, illness and disaster won’t automatically pass you by just because you hope it will. Instead you need to consider taking out mortgage insurance to cover your mortgage repayments if for any reason you can’t.
Your mortgage is not a set and forget investment, and you need to be planning carefully to protect yourself and your family now and into the future. However, you often have to act quickly for other reasons, as some insurers require you to have purchased insurance within the first two year of paying the escrow, while others will offer insurance until the fifth year.
When you take out mortgage insurance you will usually be taking it out for the full amount of the mortgage, at the beginning of the term. In the past, insurers would only pay out the remaining balance of your mortgage if you made a claim, but many insurers will now pay you the full amount of your mortgage whether you are one year, 10 years or 15 years into your mortgage and have paid off $1,000 or $20,000. In this instance the insurer will pay the benefit to you or your beneficiaries, to be used in any way you need to. Other insurers will allow you to keep your mortgage protection insurance to adjust into a life insurance policy as your mortgage commitment becomes less.
Do I Need Mortgage Protection Insurance?
In some cases you can be entitled to government assistance if you become sick, injured or die and are unable to pay your mortgage. However, these benefits often have waiting periods and eligibility criteria which will exempt you from payments if your partner earns a certain amount, or if you have a certain amount of savings which could go towards your mortgage. Therefore, if you want to make sure your family can preserve their way of life, maintain an emergency savings fund and feel secure in making their home loan repayments, you will need to organise for mortgage cover.
You can take out mortgage protection cover to suit your needs, and pay out a benefit for:
> Life. To be insured in case you die, your mortgage is paid out.
> Disability. If you are unable to work because of illness or injury your monthly repayments will be paid.
> Involuntary unemployment. If you lose your job your mortgage repayments will be covered for a certain amount of time.
> Trauma. If you are diagnosed with a serious condition such having a heart attack, stroke, cancer, or you need an organ transplant or coronary artery surgery. This benefit is paid in addition to your mortgage insurance benefit and can be as much as an extra $50,000.
It is a wise move to consider including Mortgage Protection in your financial plan to ensure any financial burden on your family is removed should something happen to you.