Mortgage protection plans are life assurance policies taken out to cover against the death of a mortgage holder. The plans pay out a lump sum which reduces over a period of time, in line with the reduction in a capital and interest (‘repayment’) mortgage of the same size and term.
In the event of the death of the insured, the sum is paid to their estate or beneficiaries, and is primarily designed to allow the spouse or dependants to pay off the outstanding mortgage and continue to live in the home with no further mortgage payments.
Monthly premiums for the plan are usually fixed from outset and take into account the health and circumstances of the applicant as well as the size and duration of the mortgage. Also important is the interest rate to be charged on the mortgage, as the plans usually guarantee to pay off the outstanding amount as long as a certain interest rate is not exceeded during the life of the loan.
Mortgage protection plans are low cost basic life assurance protection policies. They can be taken out in joint names and would then pay out on the death of the first person to die within the term, and then stop.
It is also possible to add ‘critical illness’ protection to such plans, which would then pay out the sum insured upon the diagnosis of the plan holder suffering any one of a number of serious illnesses covered by the plan. Such illnesses include heart attacks, cancer, a stroke, kidney failure, heart bypass surgery, coma, total permanent disability and a range of other conditions.
In isolation mortgage protection plans can provide simple protection in case of premature death for the outstanding mortgage amount, which is usually most people’s largest financial expense. However they should not be considered as adequate protection for all of your circumstances and other types of cover may also be needed.