The Difference Between Mortgage Protection and Life Insurance
Lets face it, buying a houseis a lot of hassle and very confusing as you have to tread a path through the minefield of bank and legal jargon to figure out what the hell is going on and what is needed of you. Add in builders and stressful isn’t the word!
In this minefield is the requirement to have Mortgage Protection Insurance which in many cases is the first type of life insurance that anyone purchases as (a) it is mandatory and (b) it’s the cheapest form of life insurance. Whether most people know exactly what they are buying is open to question particularly with their bank hounding them to take it out. We did the first Irish survey in September 2018 via experts Ireach, on how the banks sell this type of cover and surprise surprise we found that 47% or 3 out of 5 Irish people surveyed said they felt that their bank put pressure on them to take out their mortgage protection policy with them.
Why the banks make it mandatory for you to have it when you take out a mortgage with them is because if you happen to be run over by the local bus – they want to ensure that the mortgage loan for X thousand that they gave you is paid off immediately. In short, the mortgage protection policy protects the bank’s ass and yours if you unfortunately die during the term of your mortgage as no one wants the bank chasing their next of kin to pay the mortgage. Note that in all cases the proceeds of your mortgage protection policy go to your bank so there is nothing left to look after your loved ones.
Life insurance, on the other hand, does that as it is typically taken out to protect you and your loved ones so that if anything happens to you – there is a lump sum left i.e. the amount of cover you took out, to help them cope with the financial stress of your departure. For example, to cover living and educational expenses for a young family where the main breadwinner passed away. Unlike mortgage protection there is no mandatory requirement to have it rather a prudential one when the time is right and you can afford it.
· First Golden Rule – Avoid the banks at all costs when you are getting your mortgage protection and indeed any life insurance. We know banks aren’t easy to avoid but there are three big reasons for giving them the two fingers..
1. They all only deal with one life company whereas brokers like Low.ie cover the whole market i.e. all the life companies.
2. They don’t give you the best cover in the market (e.g. if you are a couple, you get double the cover for free with Royal London’s mortgage protection policy) or the best value (their minimum premiums are among highest in the market)
3. They will not only try and sell you mortgage protection but will strongly encourage you to take out serious illness cover, life insurance, etc as well!
· Second Golden Rule – Be careful if you add Serious Illness Cover to your mortgage protection policy. Serious Illness cover is a policy that pays out a lump sum if you get seriously ill e.g. have a stroke, heart attack, cancer etc. It is indeed very prudent to have this type of cover BUT it pushes up your cost of cover big time and crucially if you do get seriously ill the life company don’t pay you the lump sum to help your recovery – they pay it to the bank to reduce your mortgage loan. It is not a mandatory requirement unlike mortgage protection so wait until you can afford such cover and make sure and shop around.
· Third Golden Rule – Why are we Irish so slow to switch and save money.. how many of us are still with Electric Ireland (or the ESB as most of us know them)? Thankfully the culture is changing and like those who exhort you to switch your gas and electricity and your broadband etc - you can also switch your mortgage protection cover at any time and make sizable savings (particularly if a bank sold you your policy).
· Fourth & Final Golden Rule – If you are the jammy so and so that is in the enviable position of being able to pay off your mortgage before the end of your loan term – Make sure and cancel your mortgage protection cover as your bank will keep debiting your account unless you have cancelled the policy with your life insurance company and the direct debit with your bank.
Finally, as Benjamin Disraeli (Don’t ask ….well known historical figure!) said …
Protection is not a principle but an expedient.
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