What is the difference between a mortgage protection plan and a mortgage protection policy?

This is something that confuses many people, partly because the words used are quite similar but also because there is a simple sort of ignorance over questions of insurance and protection.

To put it in basic terms, a mortgage payment protection policy (MPPI) is a form of insurance which pays out should an individual become unemployed or ill or disabled through sickness or an accident, meaning they are out of work for a long period. The payout for MPPI should be equal to a person's monthly mortgage repayments plus other home related bills such as endowment premiums or home insurance. The payouts are short-term, in that they are limited to a maximum of 12 months or maybe 24 months.

A mortgage protection plan is a policy aimed at covering the full amount left outstanding on an individual's mortgage should they die. It is often called decreasing term insurance, as the amount that needs to be covered reduces every time a payment is made, which means premiums are lower than straight term insurance.

One of the main sources of confusion between the products is that many "life insurance" companies actually offer both products, which in the case of mortgage protection is fine, as mortgage protection is a form of life insurance. But MPPI is a short term product, which is not linked to your life, but life insurance companies still offer it anyway. Protection policies linked to a person's life are mortgage protection, family protection, whole life assurance or term assurance. Many products are packaged under different names but the products apart from whole life insurance are basically term policies. These are made more attractive by packaging them with other products such as a mini isa or critical illness or an endowment. Straight term insurance sees a person insured against death for an agreed period of time and for an agreed amount, with the policy terminating at the end of term and cover no longer applying.

So, the ultimate question is would it make sense for a person to take out both a mortgage protection plan and a mortgage payment protection policy at the same time?

The answer to this is yes. If you are the main breadwinner in your family, with the mortgage payments and amount being based upon your income, and you were to die or lose your job there could be huge problems for your family. MPPI only covers accidents, sickness and unemployment, not death, so should you lose your job you and your dependents can get your mortgage and other related bills such as endowment payments and house insurance paid. But should you die MPPI won't help, you need mortgage protection. Likewise, mortgage protection won't help if you lose your job.

 

 

 

© AskFinancially.com 2008

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