Mortgage protection insurance: what it is and whether you need it

What mortgage protection is

Mortgage protection is life cover that matches your mortgage. If you die during the term, the policy pays the lender what is left on the loan. The home stays with your family, with no mortgage on it.

The standard policy is decreasing term cover: the amount insured falls each year as the mortgage falls, so the premium is low. It pays only on death. Some policies add:

• serious illness cover, which pays if you are diagnosed with one of a list of illnesses
• level term cover, where the amount insured stays the same, so any surplus goes to your family
• income protection, a separate policy that pays part of your income if you cannot work

None of those is required. The lender needs only the basic cover for the loan amount and the loan term, in your name (both names on a joint mortgage), with the lender's interest noted on it (called an assignment).

It is not the same as home insurance, which covers the building, or payment protection, which covers the repayments for a while if you lose your job.

When you need it, and the exceptions

Section 126 of the Consumer Credit Act 1995 says a lender must make sure a home loan is covered by a life policy that would clear it on death. So the loan offer has a condition: proof of cover before drawdown. Your solicitor sends the policy to the lender, and the money does not move without it.

The exceptions in the Act:

• you are over 50 when the loan is taken out
• the home is not your main residence (a buy-to-let or a holiday home)
• you cannot get cover, or only at a cost well above the normal premium, because of your health
• you already have a life policy that would cover the loan, and you assign it to the lender

An exception is the lender's decision, and a lender can ask for cover even where the Act does not. If you have a health condition, apply for cover early: underwriting can take weeks, and a refusal or a loaded premium needs time to deal with before the closing date.

Start the quotes as soon as you have approval in principle. Buy the policy when the loan offer arrives, with the start date set for the drawdown.

What it costs

The premium depends on your age, your health, whether you smoke, the amount and the term. A non-smoker in their 30s pays a small sum each month; a smoker in their 50s pays several times that. Typical first-year costs run from €200 to €700, but the range outside that is wide.

The things that move the price most:

• smoking (the single biggest factor)
• age
• health conditions, and the medical questions you must answer honestly
• the term: a longer mortgage means longer cover
• joint cover on a joint mortgage (one policy on two lives, or two policies)
• the add-ons: serious illness cover can double the premium

Your lender will offer you its own policy, often through a tied insurer. You do not have to take it. Under the Consumer Protection Code, the lender cannot make its loan depend on you buying its insurance. The same cover from another insurer or a broker often costs less; get at least two quotes. The table below gives the typical first-year range from our costs config, not a quote.

How to choose a policy

Four things to compare, with the amount and the term the same on every quote:

1. The premium, and whether it is fixed for the term or reviewable.
2. A conversion option: the right to extend or convert the policy later without new medical questions. It costs a little more and is worth asking about if you may move or top up.
3. Joint or two single policies. A joint policy pays once, on the first death, and then ends. Two single policies each pay. The second costs more and covers more.
4. The add-ons. Serious illness cover and income protection are real decisions on their own. Keep them separate from the mortgage decision; the lender needs only the basic cover.

Who sells it: insurers directly, brokers (who may also be your mortgage broker), and your lender. Every one of them must be on the Central Bank's register as an insurance intermediary or an insurer. Check the name.

Answer the medical questions in full. A policy can be refused at claim for an answer that was not complete, and the one person who would have to argue it is the person you bought it for.

What can go wrong

The problems people run into:

• Cover not in place at drawdown. The closing is set, the policy is still with the underwriters, and the solicitor cannot draw down. Start early.
• A refusal or a loaded premium. A health condition can mean a higher premium, an exclusion or a refusal. Apply to more than one insurer: they do not all take the same view. If no one will cover you, the Act allows the lender to proceed without it; ask.
• The wrong amount or term. The policy must cover the loan amount for the whole term. A 25-year policy on a 30-year mortgage will be sent back.
• Cancelling the old policy on a switch. When you switch lender you can keep the same policy and reassign it. A new policy at an older age costs more.
• Letting it lapse. A missed direct debit can end the cover. The lender may not notice until a claim.

Complaints about an insurer or a broker go first to the firm, then to the Financial Services and Pensions Ombudsman, free of charge.

Where to find cover

MortgageWise does not pass your details to an insurer. This page gives you what you need to choose for yourself:

1. the Central Bank's register at registers.centralbank.ie, where you check that any insurer or broker is regulated
2. the CCPC's page on mortgage protection, which explains the cover in the regulator's own words
3. our mortgage rates comparison at /compare/mortgage-rates, because the lender you choose decides what cover the loan offer asks for

Your mortgage broker, if you use one, can usually quote protection as well. Ask for it as a separate decision from the mortgage, with the premium in writing.