How Much Mortgage Payment Protection Insurance to Acquire

Mortgage payment protection insurance (MPPI) is a private insurance policy designed to cover mortgage loan repayments should the policyholder suffer accident, sickness or unemployment. Individuals considering MPPI have the option to cover their full monthly loan payments and their associated home costs (both within certain limitations). How much MPPI cover an individual takes out should depend on their own financial situation and their attitude towards risk. Listed below are factors to consider when deciding how much mortgage payment protection insurance to take out.

Total monthly mortgage payments and associated costs

When deciding how much cover to take out there are naturally two limitations, the minimum cover of zero and the maximum cover of the full monthly loan payment and associated costs. On top of the direct loan payment individuals are also able to insurer 25 percent extra for associated costs such as utility bills, local area tax and home insurance. Thus, the maximum that could be insured is 125 percent of monthly mortgage loan payments (naturally this is subject to maximum cover limits).

Company provided insurance

It is sometimes the case that the firm an individual works for provides them with income protection insurance. Income protection provides insurance cover for an individuals earnings, paying out if the policyholder is off work due to sickness or injury. In this case the accident and sickness component of the MPPI policy may want to be excluded altogether as mortgage payments could be covered by the income protection policy. However, the redundancy component of the policy can still be taken out as a standalone policy.

Company sick pay

Most companies will pay some level of sick pay if their employee is off work due to sickness or injury. The issue is that sick pay only lasts for a short period of time and not all employers pay full salary sick pay. If the employer pays full sick pay then an individual considering MPPI should set the deferred period of their policy equal to the length of their sick pay. If a reduced amount of sick pay is paid by their employer an individual may consider topping up their sick pay with MPPI cover but as the MPPI cover cannot be increased once the sick pay period ends it is probably better to take out full mortgage cover from the start of the policy.

Savings

It may be the case that an individual has a substantial amount of savings. In this case mortgage payment protection insurance may not be necessary. However, looked at another way, MPPI could be used not to insurer monthly mortgage loan payments but to insurer that family savings do not get used paying for those repayments. The middle case would be where MPPI cover was taken out to top up however much of the loan payment could affordably be made from savings.

Thus, when deciding how much mortgage payment protection insurance to take out it is important to consider the total potential liability (monthly mortgage payment plus associated home costs), company provided insurance, sick pay and family savings. Naturally, MPPI comes at cost in terms of monthly premiums and therefore individuals need to consider what financial risk they would be placed under should they lose their job or be unable to work due to accident or sickness and compare that risk to the cost of the premiums in making their cover choices.