Mortgage Protection Insurances Flashcards
Life Assurance
Known as Mortgage Protection Policies - designed to pay off mortgage if borrower dies during term.
Term Assurance policies used either on reducing or level term basis
Cover is cheap, taken out on single or joint life basis - policy usually pays out on first death - thus protecting surviving borrower.
Don’t confuse with MPPI - MPPI = Short Term
Decreasing Term Assurance
Reduces in line with C&I Mortgage - always enough to repay loan if death during term
Only exception is if interest rates exceed 14% during life of mortgage
Fixed price through term of policy - cheap
Level Term Assurance
Sum assured is fixed and payable if life assured dies in policy term
Premium fixed through the term
More expensive than decreasing term because the cover does not reduce
Used with ISA or pension-linked mortgage where cover is not built in
Convertible Term Assurance
Level term assurance with option to convert the policy to a whole of life or endowment - no further evidence of health required.
Premiums slightly higher than level term - 10% more
Option to convert can be exercised at any time during life of policy - revised premium will be based on age of individual at time of conversion.
May be useful for those on limited incomes who need life cover but who cannot currently afford endowment premiums
Personal Pension Term Assurance
Tax relief available until Dec 2006
Withdrawn - no longer available to new customers.
Both level and decreasing life cover can be arranged as personal pension term assurance.
Mortgage Payment Protection Insurance MPPI
A.K.A. Accident, Sickness and Unemployment Insurance (ASU)
Does not provide life cover
Usually allows more than one claim - provided premiums paid
Age 18 - 65, medical Q not required
Covers borrower’s mortgage payments up to 2 years if unable to work due to unemployment, accident or sickness
Deferred period - typically 28 days
Unemployment cover starts after 3-6 months of being policyholder
Cover can be arranged for 12-24 months
Benefits are TAX FREE
Policy is renewable - but insurance co. could decline to renew it.
If lender provides the cover, the plan premiums can be collected along with regular mortgage payment.
Mortgage Payment Protection Insurance - Exclusions/Restrictions
Pre-existing medical conditions not covered
Claims resulting from the following not covered:
- Self-inflicted injury (other than accidents)
- alcohol abuse
- substance abuse
- AIDS/HIV
- Pregnancy
- Involvement in criminal acts
Permanent/total disability claims must meet insurer’s criteria.
Mortgage Payment Protection Insurance - Unemployment Cover
Applicant must’ve been continuously employed for minimum period before proposal can be accepted
No pending redundancy covered.
No benefit if redundancy occurs within a specific period of plan starting - typically 6 months.
Unemployment is not covered if it arises from resignation, retirement, voluntary redundancy, dismissal for misconduct
Changes to rules for Support Mortgage Interest (SMI) mean that those claiming benefits on UC can claim SMI after 39 weeks - covers max mortgage of £200,000. Only covers interest payment.
Income Protection Insurance - IPI - (Permanent Health Insurance)
IPI = monthly tax free income when policyholder unable to work due to accident or sickness
Permanent cover - insurer CANNOT CANCEL the cover or increase premiums because policyholder has claimed on it in the past.
Features:
- Long term replacement of income
- Monthly tax-free income if policyholder cannot work through sickness
- No cover for redundancy or unemployment
Benefits of IPI
Non-cancellable by insurer - regardless of number of claims made
Benefits paid after a deferred period until policyholder retires, dies or returns to work
Deferred period = 4 to 52 weeks
Longer deferred period = lower the premium
Max benefit across all IPI policies held is 60-65% of gross pre-disability earnings, less the person’s State incapacity benefit
IPI Proportionate Payments / Premiums
If insured able to return to work - but in a less onerous capacity on a lower income, a proportionate payment may be made
IPI policy will pay a portion of the max. benefit to make up for reduction in income
Premiums depend on occupation/hobbies/gender/age
Group IPI Schemes
Many employers offer group schemes and pay premiums on behalf of employees. Cheaper under group scheme compared to individual policies.
Benefits paid to employee, paid as earned income via PAYE.
Critical Illness Insurance (CIC)
Tax free lump sum on diagnosis of specified illness including:
Cancer Stroke Heart Attack Kidney Failure Multiple Sclerosis Rheumatoid Arthritis
Lump sum payable if insured survives for specified period from date of diagnosis - usually 28 days
After a payment made - policy is cancelled
CIC can be stand alone or addition to a term/endowment policy in which case policy pays on death or diagnosis - whichever occurs first.
Can be used to repay mortgage debt whilst the person is still alive
Waiver of Premium
Offered on many protection policies
Designed to ensure that policy benefits on life assurance and CIC are preserved
Policy premiums are paid if the policyholder is unable to work because of ill health.
Particularly useful for the self-employed, whose income ceases immediately.
Premiums are waived for a period of at least 13 weeks following a claim
Premiums must continue to be paid during this deferred period.
