This payment protection insurance could prove to be a valuable policy - Gareth Shaw

Gareth says…

It is understandable that you would be wary about buying anything labelled payment protection insurance, or PPI.

After all, this was an insurance product that was mis-sold to thousands of borrowers, forcing banks and lenders to compensate people to the tune of more than £50bn.

Mortgage payment protection insurance, however, is a different beast – and actually could be quite a valuable policy to hold.

Given that your mortgage is likely to be your biggest monthly outgoing, this policy is designed to pay out and cover your repayments if you’re unable to work, through sickness or redundancy.

There are a few different types – you could get a policy that pays out only if you become unemployed, one that pays out if you get ill or injured (accident and sickness policies), or one that pays out for any of these events.

If you need to make a claim, you will be paid a fixed amount on a monthly basis to cover your mortgage repayments, usually for around two years.

You could set your payouts to cover other bills – if you do so, the maximum payout you can expect to get is around 125 per cent of your mortgage costs.

Alternatively, you can set your payout as a percentage of your salary – this is usually capped at 50 per cent.

The downside of mortgage payment protection is that it may not cover all your needs.

If you were ill or unemployed for more than two years, you will not get further payouts.

In this instance, an income protection policy may be more suitable.

They require a medical assessment, and can be more expensive than a mortgage-linked policy.

There are some other critical features of mortgage protection insurance you need to be aware of.

There is usually a period you’ll need to be off work for in order to make a claim – typically ranging from 30 days to 180 days.

The longer you wait, the cheaper your policy will be.

If your employer has a long-term sickness benefit, that will continue to pay all or a percentage of your salary for a certain period, it may be beneficial to select a longer ‘moratorium’ period to keep costs down, as your repayments will be covered by your salary before the insurance kicks in.

What you do for a living will affect the price you pay.

Office workers will be cheaper to insure, and those working in construction or manual workers will be more expensive to insure.

You aren’t typically covered for pre-existing medical conditions that have recurred in the 12-24 months before taking out the policy.

There will be other medical exclusions, so ask your broker to explain these to you.

I would also suggest taking out some life insurance, which covers the size of your mortgage. You can set this so that the amount of cover you have reduces as you repay your mortgage (decreasing term cover).

If you’re young and healthy, life insurance can be cheap and will ensure that your heirs can inherit your property and its value in full, rather than being forced to sell and repay the money to a lender.

Gareth Shaw is Head of Money Content at consumer choice brand which.co.uk.

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