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Mortgage Insurance

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When it comes to insurance, any type of insurance and especially that for mortgage related policies, we've got to be on our guard.

Why, because it's easy to both buy expensive insurance and insurance that is unnecessary.

The main problem with insurance - It's often expensive
Insurance is a worthwhile and in many cases a sensible option. But sadly the banks and insurance companies are ever greedy for profits and often can't resist -
  • (Often) overcharging us, and
  • Adding so many small print exclusions that a policy might turn out to be worthless when trying to claim (declining to pay because of a minor pre-existing medical condition from 20 years ago is just one trick for health or life related insurance)

One of the reasons the insurers can overcharge is that consumers often have no idea what is a sensible price to pay. For example, if you went into a shop to buy a can of Coke and it was £5 you wouldn't buy knowing it was ridiculously overpriced.

But what if you were quoted £350 for a certain insurance policy, one which you'd never bought before and didn't have any experience of? Perhaps it's a good deal, but what if it's 200% overpriced, how will you know?

The answer to this problem is twofold -

  1. Research what you're buying - is the policy really needed as well as advantages/disadvantages, and then - See Secret 2 - Do your own research - it won't take long - which is one of this site's 10 Secrets to Good Personal Finance.

  2. Shop around - when it comes to insurance never buy the first policy you're offered, always see what the competition is offering - See Secret 5 - Play banks and finance firms at their own game
Be on the lookout for 'scare marketing' tactics

Insurance marketing and salesmen love to push products on the back of what's called 'scare marketing', for example -

"If you don't buy this insurance and lose your job your house might get repossessed and your family could be evicted on to the streets"

Ok, perhaps that is overly dramatic but you get the point. So always be ready for these ploys and ask yourself if you really need the insurance or is someone trying to convince you that you do. In many cases it will be the latter.

Types of Mortgage Insurance

Mortgage Payment Protection Insurance (MPPI)

Both mortgage lenders and brokers love to sell this style of insurance as it pays a hefty commission because it's usually expensive (for the customer).

As the name suggests it's an insurance policy that will pay the monthly repayments if you are unable to work, because of either illness or an accident.

  • A policy usually pays out 30, 60 or 90 days after the event
  • So if you stop working on January 1st you'll start receiving money in February, March or April
  • The policy lasts for a set time, usually 1 year

The trouble with a MPPI is that in theory it makes a lot of sense but in practice it's been ruined by the greedy finance companies, both by overcharging and by adding so many small print exclusions that you may well find you can't claim.

However, it is just another insurance policy so if you need it you're strongly advised to shop around taking special care to compare prices between different polices and also the small print.

Where to get good value mortgage and payment protection insurance
  • British Insurance is known to be the UK's leader in good value Mortgage and Income protection insurance
  • Personally I like the way the company continues to rally against the larger insurance companies and banks for taking advantage of their customers
  • Go to their site for more details and to get a free quote (no personal details need to be added)
The costs

MPPI costs are between £30 - £60 a month to insure a £1,000 monthly repayment. For example, if you currently pay £500 a month in mortgage repayments the insurance will cost between £15 - £30 a month or £180 - £360 for the year.

However, if you shop around you should be able to find cheaper policies. I would start by looking at what the British Insurance offers as their quotes are often hard to beat.

According to the Association of British Insurers 21% of households have MPPI cover and spend an average of £407 per annum.

Where to buy MPPI

Probably the worst place to buy would be from your lender/broker as they're almost guaranteed to overcharge you. Remember, insurance is insurance so most policies are similar although the small print exclusions can differ.

If I wanted to buy this insurance I'd use the 3 point strategy discussed below in the LearnMoney.co.uk comment at the bottom of this page.

Is MPPI worth it

It all depends on your financial circumstances.

For example, if you're single with no dependents then probably not. But if you're married and have little or no savings then losing your job might pose some real problems.

One alternative that some people use is to self-insure.

For example, they'll transfer £50 - £100 a month from their salary into a separate savings account. This will then be used to pay the mortgage if they lose their job or cannot work for any reason.

The advantage to this strategy is obvious but the disadvantage is that you might have paid into the fund for only 9 months before having to access it, and there won't be sufficient money available.

However, self insuring is something to think about if you can afford it.

MPPI Tips -
  • If you're not sure whether you need MPPI why not look to insure just half your monthly repayments

  • If your monthly mortgage payment drops (because of lower interest rates) you won't need as much cover so call your insurer up and get the MPPI premiums reduced

  • When you get a quote it will only be for the mortgage payments so it's a good idea to get any insurance payments covered as well, for example your life insurance

  • If you already have Permanent Health Insurance your may not need MPPI it is therefore very important to fully check out the terms of you PHI policy

Income protection insurance

Note that some people refer to this as Permanent Health Insurance (PMI).

It's similar to Mortgage Payment Protection Insurance (MPPI) and as its name suggests it guarantees an income if or when the policyholder can't work, perhaps through illness or an accident. Note, that unlike MPPI this style of insurance won't offer unemployment cover.

Some prefer this to critical illness cover (discussed below) because it will pay out if you can't work because for example of a broken leg, whereas critical illness won't offer cover because the condition is clearly temporary.

Critical Illness Cover

Critical illness insurance pays out a lump sum if you're unable to work any more, perhaps for example you suffer a serious heart attack.

There's a good chance when you sign up for a mortgage that someone will aggressively try to push this cover as it normally pays a hefty commission.

If you do think this is worthwhile insurance then my advice is threefold -

  1. Shop around as it's very possible for one insurance company to quote you £100 a month whereas another quotes £40 for almost identical cover, and
  2. Take time to study the smallprint of each policy
  3. Talk with a specialist provider - Critical illness can be somewhat complex because of the small print (especially how it relates to pre-existing medical conditions) so it often pays dividends to talk with a specialist insurance company

Life Insurance

This will pay out a lump sum if you die and it normally lasts for a set period of time.

For example, if you are currently 40 with 2 young children your death could be financially devastating for your family. But if you're 60 and both your children are grown up and working then from a financial perspective it won't nearly be as bad if you pass away.

So life insurance is normally sold for a set period of time, perhaps 5, 10, 15 or 20 years etc. And its main role is to be able to pay off your mortgage principal in full if you die.

The good news is that Life insurance is relatively cheap (a 25 year old wanting £100k of cover over 25 years would pay about £6 a month, or £72 a year). But as ever be wary about buying it from your lender/mortgage broker as chances are their policies will be expensive. Instead, go to a specialist broker plus see what's available on the internet.

Household Insurance

Don't confuse 'household' insurance with 'contents' insurance. Household insurance is compulsory if you have a mortgage as if your property burns down or gets destroyed the lender knows his investment is safe.

Contents insurance is obviously there to cover against fire, damage or theft of the house contents and is not compulsory. However, I wouldn't recommend not insuring the contents..

Be on the lookout for your lender insisting as part of the overall mortgage deal that you have to buy household insurance from them. The chances are this will be overpriced but it is possible that they will let you pay a small fee of £25 - £50 to get out of this.

Be wary of insurance offered by your lender

It's a standard business practice for many lenders to sell overpriced add-ons and this includes all sorts of insurance relating to mortgages and property in general (contents insurance etc).

By all means consider what they're offering but then do some independent research into what other firms are charging. You probably will find insurance cheaper if you buy independently.

LearnMoney.co.uk comment :
Mortgage related insurance is not the problem and as I've indicated before some policies make good sense. However, it's the expensive costs you've got to be on the lookout for.

So consider using the following strategy to get either a better deal or to realise you don't actually need it -

  1. Figure out if you really need the cover, or is somebody trying to convince you that you do (possibly by using scare marketing tactics)

  2. Do plenty of independent research especially into the potential costs and small print, ie what's covered, what's not, are there any restrictions etc

  3. Go and have an informal chat with a specialist insurance broker to see what he advises, you obviously won't have an obligation to buy from them

Follow those steps and you should be fine as you'll not only have a good idea of what is value and what is expensive but with the help of an insurance broker you're unlikely to over insure (duplicate) your cover hence wasting unnecessary money.

In my experience using an insurance broker is not nearly as expensive as you might think.

Where to get good value mortgage and payment protection insurance
  • British Insurance is known to be the UK's leader in good value Mortgage and Income protection insurance
  • Personally I like the way the company continues to rally against the larger insurance companies and banks for taking advantage of their customers
  • Go to their site for more details and to get a free quote (no personal details need to be added)
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