Mortgage Critical Illness Cover

Mortgage critical illness cover protects your mortgage loan from the risk of defaulting due to you suffering a serious illness. Such a policy will payout a tax-fee lump sum should you suffer a critical illness specified in your policy document, such as cancer or a stroke.

How does mortgage critical illness cover work?

When buying a policy you will need to chose how long you would like the cover to last and how much you would like to insure. If the purpose of the policy is solely to cover your mortgage loan then it makes sense to set the cover period equal to the amount of time you have left on the loan and the amount of cover equal to the sum outstanding on the mortgage loan.

If you suffer one of the critical illnesses specified in your policy then the insurer will payout the full amount insured as a lump sum. You can then use these funds to pay off your mortgage loan or to spend on whatever you so wish as there is no stipulation on what th payout has to be used for.

Can I cover more than my home loan?

Yes, if you would like to insure an amount in excess of your loan amount you are completely entitled to do so. If you were to suffer a critical illness it may mean that you will not be able to work and therefore earn a living or it may be the case that you have to make costly alterations to your home.

If you do not have a level of savings to support these possibilities then you may want to consider toping up the critical illness over and above your outstanding home loan to financially support you and your family. Thus, in the event of you suffering a critical illness you would be able to pay off your mortgage and still have some funds remaining to spend on what is most appropriate to your situation.

Is joint mortgage critical illness insurance available?

Yes, if you have a joint mortgage and therefore want take out joint mortgage critical illness cover then you are perfectly entitled to do so. The policy is designed to payout on what is called ‘first event’, which means that it would payout the full amount once only for the first critical illness suffered and then the policy terminates. This means that if either of you or your partner suffer a critical illness the mortgage could be paid off with the policy proceeds.

Can I combine mortgage critical illness cover with life insurance?

Yes, you can take out mortgage critical illness cover as a standalone policy or combine it with life insurance in one policy. This applies whether you have an interest only mortgage or a principal repayment loan.

In fact, you can often take out a combined life and critical illness policy for little to no cost more than just critical illness alone. With a combined policy the mortgage protection insurance would payout once on the first event of either life suffering a critical illness or death.

With many of the reputable insurers it is possible to combine your mortgage critical illness cover, life insurance and mortgage payment protection insurance into one ‘protection account’. This means that you would have all of your mortgage protection insurance policies with the same insurer under one protection account which can often result in a bulk discount.

Decreasing term mortgage critical illness insurance?

If you have a repayment mortgage loan then you can take out a decreasing term critical illness policy. With this type of policy the level of critical illness cover will decline in-line with the amount outstanding on your home loan.

This means that if you need to make a claim the sum insured will mirror the amount left on your loan and you can therefore pay off your mortgage in full. Naturally, because the level of cover decreases each year this type of policy is less expensive than a level term critical illness policy.

If you decide to also include life cover in your policy the level of cover would also decline along with your loan amount. In this case you would want to take out decreasing term mortgage life cover with critical illness.

Guaranteed or reviewable premiums?

If you take out mortgage critical illness insurance with guaranteed premiums then the insurer promises not to increase your monthly premium over the entire life of the policy. With reviewable premiums the insurer holds the right to review the risk associated with your plan and adjust the premiums accordingly at varying intervals throughout the life of the policy, often every 2 to 5 years.

A policy with guaranteed premiums will be slightly more expensive at policy commencement but tend to workout cheaper over the course of the policy and provide the peace of mind that the insurer cannot increase the premium charged.

Include Total Permanent Disability (TPD) for your own occupation?

Total Permanent Disability (TPD) using the own occupation definition provides the highest level of critical illness TPD cover. It specifies that the policy will payout if you are totally and permanently unable to work in your own occupation due to illness or accident.

TPD is an additional policy choice that provides a more complete level of mortgage critical illness cover, in addition to the 30 or so critical illnesses that will be covered on a policy, total permanent disability ensures you are covered should you be unable to work in your own occupation due to permanent disability. Please note that TPD own occupation is only available to occupation classes 1 and 2 (you will need to be working).

Critical illnesses typically covered

Although it does vary from insurer to insurer (you should check your mortgage critical illness insurance policy wording document), the critical illnesses typically specified in policy documents usually include those listed in the drop down menu below.

The most common illness covered under a critical illness plan:

In addition to the above the illness being covered the following list is typical for critical illness cover, please note that the lists of qualifying illnesses can vary between insurance providers.

Next steps

If you would like some more information, guidance or simply want to compare mortgage critical illness cover quotes, please do not hesitate to get in touch, we are here to make your life easier.

For information relating to the regulation of the insurance market please navigate to the website of the Financial Services Authority.For general information and news relating to the insurance market and products please navigate to the website of the Association of British Insurers.