Mortgage protection (also known as Decreasing Term Insurance) is life insurance that is designed to pay off your mortgage if you die. Your policy runs for the same length of time as your mortgage and covers the amount you borrow from the bank. The sum insured (life cover level) is designed to decrease in line with your mortgage. This is what makes Mortgage Protection the most cost-effective type of life cover. Mortgage Protection Insurance is only suitable for mortgages where both the capital and interest are being repaid. They are not suitable for interest only mortgages.
Mortgage Protection is a form of life insurance, the level of life cover simply reduces the way your mortgage loan balance reduces. Level Term Life Insurance does not reduce. So, if you start a policy for €200,000 over 30 years, the cover will still be at €200,000 at 29 years. This type of cover is suitable if you are repaying your loan on an interest only basis (because your mortgage loan doesn’t reduce) or if you just want life cover for family protection, not loan related. Some people opt to start a life cover policy instead of a mortgage protection policy to provide additional cover. The younger you are. The more cost effective this is.
When you borrow from a bank, they need to ensure that the loan will be paid off if you were to die prematurely. Having this cover in place protects both the bank and you.
To ensure that the payment goes directly to them – the bank insist you ‘Assign’ the policy to them. To facilitate this, you will sign a document called a ‘Notice of Assignment. This document is you giving your life company permission to pay your lender directly in the event of your death. This is a very straight forward process and is usually done within 24 hours.
Mortgage Protection insurance can be set up on a Single Life basis, a Joint Life basis or a Dual Life basis. If you are the only person borrowing from the bank, you need a single life policy to cover just your life. If you were to die during the term of the policy, your mortgage is cleared and the property is left to your estate.
If there are two people purchasing the house, the bank will require cover on both people. So you can choose, Joint Life cover or Dual Life cover. Joint Life Mortgage Protection, covers both people. If one person was to die during the term of the policy, the insurance company pay the claim, the loan is cleared and the cover ends. Dual Life Mortgage Protection covers both people independently. So, if one person was to die during the term of the policy, the insurance company pay a claim, the loan is cleared, but the surviving person remains on cover. Remember this cover is decreasing, so it will reduce each year. This type of policy provides additional family protection.
Royal London include this benefit for free.
Example of Dual Life compared to Joint Life
Sean and Claire, both nonsmokers aged 29, want to take out mortgage protection for a sum assured of €300,000 to cover their mortgage for a period of 30 years. They take out Dual Life cover for the same price as the bestinmarket Joint Life cover.
Unfortunately, both Sean and Claire pass away because of a car accident with €250,000 left outstanding on their mortgage cover. With Dual Life Mortgage Protection, the policy would pay out €250,000 to settle the mortgage, while an additional €250,000 would be paid out to their estate. So, the policy would pay out a total of €500,000.
However, if the couple had chosen Joint Life Mortgage Protection, when they both died a claim for €250,000 would have been paid out by the policy to settle the mortgage with nothing left over for their estate and the policy would have ended. So, with Dual Life Mortgage Protection, you can get twice the amount of cover for the same price as the bestinmarket Joint Life cover.
You can choose to include Specified Serious Illness as part of your mortgage protection plan. This provides additional protection in that, if you are diagnosed with one of a defined list of illnesses, the insurance company will pay out. When you include specified serious illness cover on your mortgage protection policy, the cover is always on an “Accelerated” basis. Accelerated serious illness means that any serious illness claim that was paid would be deducted from the remaining life cover amount.
EXAMPLE
Sinead & Fiona take out a mortgage loan of €200,000 with a term of 20 years. As required by their lender, they take out a mortgage protection policy with €200,000 life cover but they also add €100,000 of serious illness cover. Fiona unfortunately takes ill and the illness is one of the policy’s defined serious illnesses. The life company pays out the current level of serious illness cover. The life sum insured is then reduced by the amount of the claim. The total potential payout can only be €200,000.
It is also important to note that if the policy is assigned to the bank, then any serious illness claim would be paid directly to the bank.
The main factors in determining your premium are your loan details, i.e. the amount you are borrowing and the term, along with your age & your smoker status. These details are used to provide a “standard rates quote”. If you have additional health conditions/risks, the insurance company may apply an additional premium.
Don’t leave it until the last minute! The bank will require your original policy documents 2-3 days before they will allow you to draw down your cheque. Some applications get accepted the same day, but if you have any medical conditions its best to give yourself some time. It’s very important to note that if you have any pending investigations, for example, you’ve been recommended to have an MRI, no insurance company will provide cover until you have had this completed and the results are available.
Absolutely! You are not tied into your policy and you can switch providers at any time throughout your mortgage. You should review the cost of your mortgage protection cover regularly to make sure you are getting the best value possible. Many people set up their mortgage protection policies with the bank at the time of mortgage approval as they are led to believe they must, however banks are tied to one provider only so in a lot of cases the premiums obtained at the time were very uncompetitive. The number of people switching mortgage protection is on the increase thanks to better awareness.
It’s very important that you do not cancel any existing cover before your new cover is activated.
Once you receive your quotation and you are happy with the policy, you will need to complete an application form. You can complete & sign this online or we can email or post the application form to you. It is quite detailed in terms of medical questions, but it doesn’t take too long (about 10-15 mins). You send it back to us; email is quickest as we do not need to see the original. We will then submit the application to the insurance company on secure online systems. Depending on your own medical history, the application will either be automatically accepted or they may request some additional information.