The Basics of Mortgage Protection Insurance
Mortgage Protection Insurance (MPI) covers you against potential financial disaster by making repayments on your mortgage, in case you get sick, endure an accident, or lose your job. The concept of MPI is simple: at the cost of a fixed premium you enjoy financial protection on your property. If you pass away during the policy, your dependants are entitled to a death benefit. Most homeowners purchase mortgage protection insurance when they first buy their home.
What Factors Affect the Cost of Your Mortgage Protection Insurance Policy?
The cost of mortgage protection policies varies based on several factors. Insurers evaluate the risk factors that apply to your case and determine the premium that you need to pay for coverage. Risk factors include the event of becoming sick or unemployed or enduring an accident.
The cost of MPI is mainly determined by the loan-to-value ratio (LTV). If you borrow £130,000 for a property worth £160,000, the LTV ratio is £130,000/£160,000 = 81.3 percent. This is the percentage of your mortgage on the total appraised value of your property. Keep in mind that the higher the LTV, the higher risk undertaken by your insurer. So, you may be required to purchase MPI so that your insurers are protected against any default on your mortgage.
Another factor that determines the cost of MPI is the cost of your down payment. If the down payment is less than 20 percent of the total appraised value of your property, you may be required to purchase MPI to cover for the present economy, inflation and recession factors that may have a major impact on your mortgage payments. Moreover, if such factors are evident, you can expect the cost of your MPI policy to be higher.
Unemployment is a high risk factor because if you lose your job, you will be less likely to make your mortgage payments. In this case, you need to get mortgage protection insurance to cover for your payables. But if the risk of becoming unemployed is high, then the cost of MPI will be high as well.
How to Select the Right Mortgage Protection Insurance Policy
There are several factors that you need to take into account when selecting a mortgage protection insurance policy:
- • How much coverage is enough for your needs? The idea is to cover a certain amount of your mortgage and any relevant expenses.
- • Do you require coverage in case of accident, sickness or unemployment?
- • For what amount of time you require coverage if you get sick or lose your job?
- • How long do you have until your mortgage is repaid?
- • When will your policy pay out? Typically, policies start paying out 30 or 60 days after the incident occurs. Yet there is also the “back to day one” option, which allows the policy to backdate the benefit and you get compensated for the earlier period too. This applies to cases that you lose your job permanently.
- • What is the policy payout period? Usually, most policies pay out for 12 months. Yet, cheaper policies may pay out for three months.
- • What is the payout level of your policy? Most policies limit the monthly payments between £1,500 and £2,000. If your mortgage payment is higher, such policy doesn’t cover your needs.
Types of Mortgage Protection Insurance
Depending on your needs, you may qualify for other types of mortgage protection insurance such as mortgage disability insurance and mortgage unemployment insurance. However, it is very important to fully understand what you’re opting for. If your state of health or occupation is considered high risk by your insurer, you’re automatically looking for high premium insurance. So, instead of getting financial help, you’re putting yourself under greater financial strain. However, the goal of purchasing mortgage protection insurance is to feel secure that you will able to protect your property in case of a financial disaster.
Jacob Chapman is an independent writer and columnist, experienced in the insurance services industry. He focuses his articles on educating the individual insurance consumer and helping them meet their insurance needs. Read his articles about life assurance on www.lifeassurancequotes.org.uk or about mortgage life insurance on www.mortgagelifeinsurance.org.uk .