From Adviser Guide: Mortgage Payment Protection Insurance
Q: What are the alternatives to MPPI?
Short-term income protection is an economical relative with no connection to monthly mortgage repayments.
There are many products available that protect people’s income or outgoings, like longer-term income protection, short-term income protection or lifestyle protection products. Some will cover people not being able to work due to accident or sickness and some will also include unemployment cover.
The closest cousin of mortgage payment protection insurance is short-term income protection insurance.
Some providers, such as Scottish Provident, LV= and Legal and General, offer products that offer cover over and above the mortgage payment to protect against loss of income but also cover unemployment as a bolt-on. Some products are offered as a short-term income protection policy, while others will pay out until the customer is working again.
STIP removes the restriction of MPPI that links maximum monthly benefit to the policyholder’s monthly mortgage repayment, points out Dennis Haggerty, marketing manager at iprotectinsurance.co.uk.
“Customers are encouraged to consider their cover in terms of the amount they would need to bridge the gap between state benefits and their monthly bills after taking into account any contribution from their savings and, for example, their partners income.”
“It is more suitable to offer STIP to customers where their mortgage repayment only represents a modest percentage of their monthly bills and expenses.
But Mr Haggerty notes that although STIP is the most common insurance product, with lenders offering generous terms and allowing payment holidays, it can lead to debt ballooning, whereas MPPI will continue to pay off both interest and capital sum.
“Accident and sickness insurance is a cheaper alternative, however the lack of unemployment cover makes this difficult to recommend unless the customer is self employed.”
On the other hand, David Hollingworth, associate director at London & Country Mortgages, reminds that income protection is a more robust policy as it replaces a proportion of gross income if your client unable to work through accident or sickness.
“What it often hasn’t covered is the unemployment aspect although providers are now making that available on some policies.”