What is Mortgage Payment Protection Insurance?

Taking out a mortgage is a big commitment and sometimes PPI or payment protection insurance can be sold. In the UK this may have been mis-sold but if you are worried about being made redundant perhaps this is something to consider.

Your mortgage to buy your home is most probably the biggest loan you will ever have taken out in your life. It represents a huge investment and responsibility and it can be a constant worry, in this ever shifting financial climate, that you may be unable to keep up the payments on the loan.

What would happen if you lost your job or were unable to work because you became ill, had an accident or became a carer? How would you continue to pay your mortgage? Peace of mind can be had by taking out a Mortgage Payment Protection Insurance Policy. This kind of policy is designed to cover these eventualities, and is a relatively new kind of insurance in the market.

If you have a repayment mortgage, the insurance would repay your capital and interest repayments. If you have an interest-only mortgage, the Mortgage Payment Protection Insurance should cover your interest payment as well as your normal monthly contribution.

The Differences between the UK and the USA

The term “Mortgage Payment Protection Insurance” is used more in the UK, where this kind of insurance has become very popular. If you buy a home with less that 20% deposit it may be part of the agreement to purchase such a policy to get the necessary financing.

In the USA it is simply called mortgage insurance. Mortgage insurance began in the United States in the 1880s and grew in response to the Great Depression of the 1930s. The insurance available does differ greatly in the two markets, in both cost and scope. In both the USA and the UK a mortgage payment protection policy will payout if you die or become permanently disabled. It may protect a co-purchaser, such as a spouse or domestic partner, from assuming the full weight of a mortgage.

Problems with Mortgage Payment Protection Insurance

It’s Expensive: With typical rates of $55 a month per $100,000 financed, Mortgage Payment Protection Insurance tends to be one of the most expensive forms of insurance.

There are cheaper ways to do the same thing: If you are under 45, in good health and a non-smoker, it will probably be cheaper to take out a higher level of life insurance or disability insurance. Mortgage Life Insurance is designed to pay off your mortgage loan in the event of your death. These types of insurance generally cost about half the rate of similar amounts of protection from mortgage payment insurance policies.

Cover Limitations: Most mortgage payment protection plans in the US do not offer cover if the policyholder should become unemployed. Us employment is very low compared to income, which makes it an unattractive proposition to lenders. Unemployment cover is one of the principle reasons this kind of policy is taken out in the UK. There are many companies offering unemployment benefits for residents of the UK, some of which do operate in the USA.

Policy Exclusions: It is important for you to investigate the ‘small print’ thoroughly as there may be many exclusions in these kind of policies. Some of the more typical are listed below:

• If you’re a contract worker or self-employed certain conditions for redundancy cover will apply.
• You will be unable to claim for unemployment until your policy has been up and running for an initial period. This is typically 120 days
• You will not be able to make a claim for pre-existing medical conditions.
• You will be unable to claim for unemployment or sickness cover until you have been off work for a minimum period.
• Claims resulting from back-ache and stress will usually only be paid if radiological evidence or a psychiatrist’s diagnosis is received.
• The maximum age for cover is usually 65 years.
• The maximum monthly payout is usually restricted.
• Voluntary unemployment or dismissal due to misconduct will not be covered
• Self-inflicted injury or injury due to alcohol or drug abuse will not be covered

While Mortgage Protection Insurance may bring peace of mind to some there are often better ways to cover your mortgage repayments which should be investigated first. If you decide that this kind of insurance is for you, be sure to check the details of each mortgage payment protection policy as they vary considerably between providers.

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