Mortgage Protection

This is a comprehensive one page guide, but if you are just looking for advice on how to switch and save or take out mortgage protection for the first time, use the quote form below.

What is Mortgage Protection?   

When taking out a mortgage, you need to consider how it will be paid off in the event of your death. You may also need to consider how to continue repayments if your income falls, due to illness, or other reasons.

Mortgage protection insurance is designed to pay off your outstanding mortgage in the event of death and/or serious illness/critical illness.

Usually the level of cover reduces monthly during the term to reflect the fact that the mortgage is gradually being paid off. The shape of the reducing cover will vary according to the mortgage interest rate assumed when the policy is issued. The higher the rate assumed at issue stage, the higher the level of cover needed over the term of the policy, as the capital will be paid  off more slowly than  at a lower interest rate.

Legal Requirements

When you get a mortgage to purchase  your PDH (Principal Private Dwelling /Home, the lender will ask you to take out mortgage protection insurance policy and it will be assigned against the mortgage/loan and kept in the lender’s possession as long as the loan is outstanding . This type of policy is designed to pay it off the outstanding Mortgage/Loan on the death and/or Serious Illness of the borrower or joint borrower.

In nearly all cases, the lender is legally required under Section 126 of the Consumer Credit Act 1995   to make sure that you have Mortgage Protection Policy in existence  before giving you a mortgage/loan. There are however, some exceptions – see exceptions to legal requirement below.

However, if the lender offers a particular type of mortgage protection policy, it’s most important to note that you are not obliged to purchase it. What they may fail to tell you is that you can actually shop around for a mortgage protection policy that suits your particular needs. Your lender cannot decline your mortgage because just because you don’t buy the Mortgage Protection Policy it offers.

Your Mortgage Protection Policy only needs to be paid once so the policy should be set up on a joint life first death basis. The benefit is then paid out on the first claim (for death or Serious Illness/Critical Illness) on either life and then the policy ceases. This is usually the cheapest option. You can also have it on a Dual life basis. This is when the payment of benefits on one person doesn’t affect the level of the other’s benefits. However, this option would be more expensive and not necessary.

SECTION (126) of the Consumer Credit Act states:

126.—(1) Subject to the provisions of this section, a mortgage lender shall arrange, through an insurer or an insurance intermediary, a life assurance policy providing, in the event of the death of a borrower before a housing loan made by the mortgage lender has been repaid, for payment of a sum equal to the amount of the principal estimated by the mortgage lender to be outstanding in the year in which the death occurs on the basis that payments have been made by the borrower in accordance with the mortgage, such sum to be employed in repayment of the principal.

 

(2) Subsection (1) shall apply as respects all housing loans except—

(a) where the house in respect of which the loan is made is, in the mortgage lender’s opinion, not intended for use as the principal residence of the borrower or of his dependants,

(b) loans to persons who belong to a class of persons which would not be acceptable to an insurer, or which would only be acceptable to an insurer at a premium significantly higher than that payable by borrowers generally,

(c) loans to persons who are over 50 years of age at the time the loan is approved,

(d) loans to persons who, at the time the loan is made, have otherwise arranged life assurance, providing for payment of a sum, in the event of death, of not less than the sum referred to in subsection (1).

 

(3) A person who does not belong to a class referred to in paragraph (b) of subsection (2) shall not be required by virtue of this section to undergo a medical examination as a condition of a policy but nothing in this section shall prevent a person belonging to such a class from being required to undergo a medical examination.

 

(4) A policy under this section may, in the case of a loan made jointly to two or more borrowers, apply to such of the borrowers as may be designated by the mortgage lender, due regard being had to the wishes of such borrowers.

 

(5) Where the proceeds of a policy under this section exceed the amount due to the mortgage lender on the loan, any such excess shall be payable to the surviving borrower or to the estate of the deceased borrower as the case may

 

Exceptions to Legal Requirement

You do not have to take out mortgage protection insurance if;

• you are aged over 50 or
• the mortgage is not on your principal private residence (your home) or
• you cannot get the insurance, or can only get it at a much higher premium than normal or
• you already have enough life insurance to pay off the home loan if you die.

However, some lenders may insist that you take out mortgage protection insurance as a condition of giving you a mortgage, even if there is no legal requirement in your case.

Reviewing you Mortgage Protection Policy regularly ensures that you have the most suitable policy that suits your particular needs as you pass through your life cycle or certain events (for example building on extensions, altering the term of your policy etc). A

lso with the added competition in the market for this type of business, you will most surely save money on the premiums on your existing policy as most insurance providers are offering ‘Special Discounted Deals’.

Also you may have been once a smoker and are no longer smoking (albeit you will have to be not smoking for at least 12 months to avail of non-smoker rates).

If you had a medical condition that caused your mortgage protection policy premium to increase or you have been actually declined cover altogether, now with better underwriting improvements you will hopefully receive a much better deal/outcome.

Please always remember that you must keep your premiums up to date. If you go into arrears, there is a chance that the policy will lapse and you will no longer be on cover. In such cases your lender will be informed by the insurance company that your policy has lapsed and you are no longer on cover.

The lender may well have a big issue with this as don’t forget it is usually a legal requirement to have this sort of cover in place and assigned to them while the loan is still outstanding, it was part of the contract you would have signed with them. They are the legal owner of the policy until you actually pay off all your mortgage/loan debt with them.

There are different types of mortgage protection that you can use and may suit your particular needs better than others. Please see below the different options/policies open to you to use.

THE DIFFERENT TYPES OF MORTGAGE PROTECTION POLICIES AVAILABLE

Decreasing Term Assurance Policy

This is often taken out as a Mortgage Protection Policy and is where both the requirement and the amount of cover decreases as your mortgage is repaid and your need for protection recedes. It is based on an a certain interest rate and the cover is supposed to decline in line with mortgage balance each year. It is the cheapest form of Mortgage Protection Cover available in the market and that is totally acceptable by the lender as an assignment against your mortgage/loan.

Level Term Assurance Policy

This again is often taken out as a Mortgage Protection Policy especially were the mortgage/loan is on an interest-only repayment schedule.

The cover remains level throughout the term of the policy thus if you are not paying back any capital back off your loan during the term – this is the type of policy that the lender will require you to have (as the loan amount will always be covered in full and they are always fully protected for the full loan amount should you die or have a serious illness/critical illness).

Quite simply, when you take out a Level Term Policy, you agree to pay a specific or level premium over a pre-agreed number of years. Every year as you get older, your risk of death or contracting a serious illness increases so your level premium is based on the average risk of death.

Some people also like this type of cover because if they are on a ‘Capital & Interest’ repayment schedule and something should happen like death or serious illness/critical illness, the mortgage will be paid off but the surplus over and above the repaid mortgage amount will be paid off to their estate to look after dependants, other personal loans etc.

Adding Serious/Critical Illness Cover

As I have mentioned a few times already through this article, you can add Serious Illness/Critical Illness Cover to your mortgage protection policy.

Serious Illness/Critical Illness insurance is that which is linked to a mortgage you’re your entire loan if you contract any of a defined number of Illnesses.  It is designed to alleviate the financial burdens of anyone who suffers a serious life threatening illness or condition. It does this by paying you a tax-free lump sum on official diagnosis of a serious Iillness/critical illness.

The lump sum can then be used to pay off your mortgage balance.  Serious Illness/Critical Illness Cover is becoming an increasingly popular part of mortgage protection policies, and both the level of cover and the premium payable can be arranged either on a level or decreasing premium basis (as described in greater detail in the above two sections).

It’s important to remember that in the latter case, your cover decreases in value with the decreasing value of your outstanding mortgage. The drawback however is that although your benefits will clear your outstanding mortgage, there will be no extra cash available to ease any other financial burdens you may face. By arranging cover on a level term basis, you will be guaranteed a lump sum (the size of your original mortgage) throughout the entire duration of your loan. The premium will be higher if you choose to add on Serious Illness/Critical Cover to your policy but you have to ask yourself the question, is it worth it or not?

What happens on a claim?

If you die or suffer a serious illness/critical illness, your insurance company pays the policy benefit directly to your mortgage lender as they are the legal owner of the policy while you still have an outstanding loan/mortgage debt with them. Your lender will use the claim amount to pay off the outstanding mortgage and, if there is a surplus amount of cash left after that, they are obliged to pass it to your estate.

If you have a mortgage in your own name only, you would generally look for a mortgage protection policy to cover your own life. If your mortgage is in joint names, your mortgage protection policy will have to have a joint life policy which means that your mortgage is paid off if either one of you dies before the end of the term.

Where is the best place to look for the best advice regarding buying a mortgage protection insurance?

You should always look for an impartial independent adviser to access your situation and present you some options. An independent Broker would be the perfect match here as they do not have agenda in getting you to buy a product/cover that does not suit your particular needs and they also deal with all the insurance companies so they can make sure they get you the best deal (ie cheapest premium).

In some cases they can even provide a discount on the cheapest premium in the market. It is important to note that you do not have to take the mortgage protection policy your lender offers you and you are free to shop around for a suitable policy and one that fits your particular budget & needs.

It is extremely important to note that your lender cannot refuse you a mortgage just because you don’t accept the policy they recommend.

Is mortgage protection necessary if you already have a life insurance policy?

If you have an existing Life Insurance policy and want to use it for mortgage protection, then you can do so if wish once the cover amount is at least equal to your outstanding mortgage and the term also doesn’t cease till the mortgage term matures.  You can assign this existing life policy to the lender and they will have to accept it if meets the right criteria. They would then become the legal owner of the policy until the mortgage/loan is repaid in full to them.

Finally, please remember that if you use your  total life insurance benefit as a mortgage protection policy to pay off your mortgage when you die, there may not be any extra cash lump sum available for your dependants. That’s the reason why it’s probably advisable to keep both type of policy separate.

What happens if you switch your mortgage protection policy to a different insurance company?

If you are switching to a different insurance company because you have been offered a better deal (e.g. cheaper premium or better quality policy based on a similar premium that you are currently paying) then this is absolutely fine and should be encouraged.

By all means shop around especially if you bought your cover in the Celtic boom (especially if directly through your bank!).

Make sure that you if you are getting a cheaper rate that you are being quoted a policy that suits your particular needs now and that the Mortgage Protection only needs to cover the outstanding balance and ter left now (as opposed to when you first took it out).

The new policy will have to be assigned to your lender against the outstanding loan/mortgage/debt and a deed of release for the old policy will be signed to release the old policy it hold. The policy should then be cancelled and any direct debits linking to it should be cancelled as well.

If you switch your mortgage, your options depend on whether you have your own policy or a group policy through your lender.

• If you have your own policy, you can simply assign it to your new lender. The premium and level of cover will be the same as before, as long as the amount you borrow and the term of your mortgage does not change.
• If you have a policy through your lender’s group scheme, your lender will cancel the policy when you switch your mortgage. So, you will have to apply for cover again so go shopping around again to get the best deal that suits your particular needs.

If you pay off your mortgage earlier than planned, you can;

• cancel your mortgage protection cover and pay no further premiums, or,
• keep the policy and pay premiums until the original end date and once the deed of release of assignment is signed any claims or benefits attaching to same will be paid out directly to you or your estate .

Finally, it is really important to make sure that you DO NOT cancel your existing mortgage protection policy until you firstly have another in place thus making sure you are never off cover at any stage as one never knows what could happen or lies around the corner!

Why premiums are now being reduced

The reality is that if you have taken out mortgage protection during the pre-2008 ‘boom years’ you are in all likelihood paying needlessly high premiums (especially if you took your policy via your bank/mortgage lender).

Aside the general ‘Rip-off Republic’ culture that prevailed amongst many finanical institutions at the time, there is now much better actuarial pricing of risk which also underlies the fact that people are living longer…even smokers!

Recently Ocean.ie analysed data from an Irish market study by Caledonian Life (known Royal London), which showed dramatic disocunts on premiums for both men and women for mortgage cover and other life products.

We poured the data into these interactive charts below which show how much you can save nowadays based on gender, age and smoking status.

Typical discounts for men

The EU Gender Directive which came into force in 2013 effectively prohibited insurance risk pricing based on gender.  This is despite the fact that women live slightly longer healthier lives.

This has meant that men are no enjoying an even greater discount on life/mortgage cover premiums and if you are male and took out a policy before 2013, you might even save up to 50% which can amount to several thousnad euro over the lifetime of your mortgage.

Typical discounts for women

Whilst women have not had the benefit of the EU Gender Directive when it comes to insurance cover (ironic perhaps given its genesis as an equality measure), there are still substantial discounts for many if not most who switch policy in 2015.

See and compare how much you can switch & save on your old policy by using the quick quote form below – and if you are taking out mortgage protection or life insurance for the first time you have come to a good place too!

Your enquiry will be sent to PHD Financial Services Ltd t/a Ocean.ie which is regulated by the Central Bank of Ireland.