What’s the right mortgage protection for you?

Age, illness, cost and the potential to switch are all factors to consider when looking at options

If an earner in your household dies, who pays the mortgage? By law, lenders must ensure you have mortgage protection insurance to cover it. This pays off your mortgage if you, or another policy holder dies.

But what happens if you switch mortgages, if you take a payment break, if you top up your mortgage, or you get sick? If the worst happens, mounting bills can add to the heartache, so this is a policy you need to get right.

Mortgage holders will pay a mortgage protection premium every month for decades, so it’s good to know what’s covered, and to shop around.

Signing up

Housebuying is a heady time. Buyers can feel pressured and vulnerable – you’d probably sign away a kidney to get things over the line. Maybe that’s what you did, you just never read the small print.

If you are in the process of getting a mortgage, know that you don’t have to buy the mortgage protection your mortgage broker or bank is offering. You’ll probably get a better deal elsewhere. Even a €5 per month difference in price could save you over €2,000 over a 35-year mortgage, says the Competition and Consumer Protection Commission (CCPC).

Get quotes from your broker, bank or directly for an insurance company, but then check a switching website to see if there’s a better deal. Ask your broker or bank if they can match it.

Be sure to answer questions honestly, declaring any pre-existing conditions or whether you’re a smoker. Otherwise your policy might be useless.

A voluntary code now means insurers will disregard a cancer diagnosis if treatment ended more than seven years before your application.

Do I definitely need cover?

If your mortgage is for a buy-to-let property, if you are over 50 when the mortgage is approved or you already have a life insurance policy that covers the full mortgage amount and is assigned to your lender, then your lender may decide you don’t need mortgage protection insurance.

Who needs cover?

Anyone named on the mortgage needs cover. If there’s two of you on the mortgage, you can opt for a joint or dual life policy.

A joint policy will pay out on the death of the first person only and then end. Dual life protection can pay out twice. For example, if your partner died during the term, the mortgage would be cleared. Cover would then continue and if you also died before the term of the policy ended, a second payout would go to your estate.

Sometimes this is no more expensive than a joint policy.

What policy?

Reducing term cover is the most common and cheapest form of mortgage protection. With this, the amount the policy covers reduces in line with the outstanding balance of your mortgage.

Say for example, you took out a €400,000 mortgage 20 years ago with reducing term protection. If the remaining balance on your mortgage is now down around €200,000, your mortgage protection will pay out to that amount.

The cover reduces at the rate of interest you choose. You should choose a rate that allows for increases in your mortgage rate, to ensure there’s enough cover to clear the balance, advises Switcher.ie.

A “level term” policy is different. With this type, if you die before paying off your mortgage, the insurance company will pay out the original insured amount.

For example, if you die with €200,000 left on that €400,000 mortgage, the insurance company will still pay out €400,000. This will pay off the bank and the remaining balance will go to your estate.

A level term policy will be more expensive.

Remember, mortgage protection insurance won’t cover your repayments if you can’t work because of redundancy, sickness, or disability. You’ll need income protection insurance for this.

What if I’m an older borrower?

When older borrowers apply for mortgage protection, the insurance company bases their decision on the health of the individual at the date of application, says Daniel Hardiman of Hardiman Life and Pensions. This means you can apply for life insurance or mortgage protection until age 89 and be accepted if you’re in good health at the date of applying, he says.

“The later the end date of your mortgage, the more expensive the mortgage protection will be. A 40-year-old couple with a €300,000 mortgage up to age 65 would cost approx €33 per month whereas a 40-year-old couple with a mortgage until age 75 would cost approx €47 per month.”

“My main piece of advice when applying for mortgage protection is to include a continuation option or a convertible option on your life insurance policy,” says Hardiman.

“For an additional premium of approx €2 a month in the above example, you can extend the term of your mortgage protection at a later date up to the age of 85 without any medical underwriting which means the life insurance company can’t refuse you if you are in bad health.”

“These convertible options have been invaluable for people who’ve had to restructure their mortgages to a later end date.”

What if I get sick?

When shopping for mortgage protection cover, you are likely to be offered a serious illness cover add-on. This means your mortgage will be cleared not only if you die, but also if you are diagnosed with a serious illness covered by your policy.

If you get sick and have serious illness cover as part of a reducing term mortgage protection policy, your claim is paid to the bank to reduce the mortgage balance rather than to you.

“We generally recommend that serious illness cover is taken out under a separate policy on a convertible level term basis,” says Hardiman. “That means it doesn’t reduce, so it’s the individual who receives the proceeds in the event of a serious illness claim, not the bank.”

“Serious illness cover will pay out a tax-free lump sum equal to the insured amount if the individual is diagnosed with a condition covered by the policy.”

What if I switch my mortgage?

Switching your mortgage can affect your mortgage protection. Be sure to tell your mortgage protection insurance provider to reassign the policy to the new lender. If the amount of the mortgage and the term remain the same, the premium and cover will stay the same.

If you got mortgage protection insurance through your bank’s group scheme however, they will cancel your policy when you switch mortgage. Make sure you can get mortgage protection insurance before switching. You are older now so cover will cost you more. If you have health issues, you may not get cover at all.

What if I top up my mortgage?

If you renovate or extend your home, you might get a top-up mortgage. It’s an additional mortgage loan to the one you have, so it may have a different interest rate and be paid back over a different time period to your original mortgage.

Make sure your mortgage protection policy meets the new value of your mortgage. Otherwise if you die, the policy will only pay off the original amount leaving your loved ones to pay off the top up.

You could get a new mortgage protection policy for the total amount of your new mortgage, or just for the top-up amount.

Compare the costs and benefits of both. Because you are older, it may be cheaper to keep your original mortgage protection policy and then buy a second policy for the top-up amount, says the CCPC.

Extending your mortgage

Over the course of a mortgage, things happen. For example, more than 50,000 households took a Covid-19 payment break by the end of May 2020, according to Central Bank of Ireland data.

Payment breaks extend the term of mortgage. If you’ve taken one, make sure to review your mortgage protection. You may need additional cover.

What if I stop paying my policy?

If you stop paying the policy may lapse. You’ll be breaching the terms of your mortgage too. If the worst happened and you weren’t covered, your property could be seized.

What if I pay off my mortgage early?

If you are lucky enough to pay off your mortgage early, you have two options. You can cancel your mortgage protection policy and stop paying, or keep the policy and continue paying until the original end date.

If your policy is a life insurance policy or it provides level term cover, you might choose to keep it going.

If you have a group policy with your lender, they may close it once the mortgage is paid giving you no option to keep it going.

What happens if I die?

If you die, the remaining balance on your mortgage is paid off. You don’t get the payout, it goes to your bank.

If the value of your mortgage protection policy is higher than the mortgage balance, the surplus is paid to your estate, so the surviving partner or other beneficiaries benefit from this extra cover, says Hardiman.

You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.

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