What is mortgage protection and why is it so important?

We know that paperwork is the least exciting part of buying a home, but it's important to protect you and your family if the worst happens. This is why mortgage protection insurance is one of the most important documents you'll ever sign.

For many people, buying a home is the largest (and most exciting) investment they'll ever make. Your mortgage payment is also likely to be your biggest outgoing payment each month.

When you're wrapped up in the buzz of buying a new home, the possibility of tragic events occurring hardly fits the narrative. But death or serious health issues can throw a family's financial plans into disarray, and lead to them losing their home. Worst of all, these terrible mishaps come with no warning and catch us off guard.

That's where mortgage protection insurance comes in. It's one of the most important policies you can sign to protect your family's future.

What is mortgage protection insurance?

When a first-time home buyer makes a down payment and has their mortgage approved, they will need to get mortgage protection cover.

The policy ensures mortgage payments continue if the policyholder dies before the outstanding balance is settled.

It's important to note that a mortgage protection plan only pays out in the event of death. You'll need to take out an extra policy to protect your family in these alternative scenarios:

• Mental health issues
• Critical illness
• Ill health
• Disability
• Unemployment

The difference between mortgage protection insurance and life insurance

Mortgage payment protection insurance policies are similar to life insurance in that they will only pay out in the event of death.

The good news is that your family can use your life insurance to cover mortgage payments. But this doesn't mean that they are the same thing.

Here's how mortgage protection insurance differs from life insurance:

Understanding the different types of mortgage protection policies

There are four different types of mortgage protection you can get. These are:

• Reducing term cover: The level of cover you receive will be reduced as you pay off your mortgage. Although your cover decreases, your monthly insurance premiums remain consistent until the policy comes to an end. This is usually the cheapest type of protection and is also the most common.
• Level term policy: Your level of cover and monthly premiums remain the same for the set period of the policy. If, for example, you die two years before your mortgage is paid off, your lender will receive two years' worth of payments. The remainder will go to your beneficiaries or estate. This has the highest average cost of the mortgage protection insurance options.
• Serious illness cover: Mortgage protection only pays out in the event of death, but you can add serious illness cover to your policy. This will cover your mortgage not only in the event of death but also in cases of critical illness.
• Life insurance: If you already have life insurance, your mortgage lender may waive the need for a mortgage insurance policy. They will only do this if your life insurance is not assigned to another loan, and it provides enough cover to pay out your mortgage.

If you choose to get mortgage protection cover on a reducing term policy or level term policy, there are three options available to you, depending on how many mortgage holders are listed:

• Single cover: This is ideal for the first-time buyer where the mortgage is in their name only.
• Joint cover: If there are two people named on the mortgage agreement (e.g. a married couple), this policy will pay out on the death of the first person only.
• Dual life cover: If there are two people named on the mortgage agreement, this policy will pay out twice upon each mortgage holder's death.

Where can you find mortgage protection insurance in Ireland?

Like all types of insurance policies, it's a good idea to shop around. You should request more than one mortgage protection quote to ensure you're getting the best price.

When comparing policies from different providers, remember that an affordable policy doesn't necessarily offer the best protection. Ensure you read the fine print carefully so you're aware of any exclusions or restrictions.

• Your mortgage lender: Lenders will frequently offer to arrange protection when you apply for a mortgage. While this is usually the most convenient option, it may restrict you if you want to change lenders at a later date.
• An insurance broker: An insurance broker will collect quotes from various insurers on your behalf, streamlining the process of comparing costs and levels of cover. Brokers may charge a fee or commission for their services, which can drive up your monthly premiums.
• Your life insurance provider: If you already have life insurance, you can assign your mortgage lender as your primary beneficiary on your policy. Once your mortgage balance has been paid, the remainder will be paid out as a lump sum to your beneficiaries or estate. If you're the primary breadwinner, this can leave your family vulnerable if there is little remaining after the mortgage has been paid off.

Some of the largest and best-known mortgage protection insurance companies in Ireland include:

• Irish Life
• Aviva
• Royal London
• Zurich
• New Ireland Assurance

How to claim your mortgage protection

The unexpected death of a loved one is already a difficult time for their remaining family. Additional financial stress makes the natural grieving process even harder to cope with.

Preparing the family now for the worst case scenario will make things easier for them later. It's wise to ensure that your next of kin knows what steps they may need to take to make the claiming process as simple as possible.

• Collect the essential paperwork: Most insurers or lenders will require certain documentation in the event of a claim, like a death certificate or the original policy document. Make sure your next of kin knows where the relevant documents can be accessed.
• Call your mortgage protection provider: Your next of kin will need to contact your lender or insurer to inform them that the policyholder is deceased. At this point, they can find out what additional paperwork they need to submit as part of the claim.
• Complete a claim form: Your next of kin will need to submit the claim form. It's important that these forms are filled out accurately to avoid delays in payment. If there are any points they're unsure about, it's better to ask the insurer or lender for clarity rather than risk filling it out incorrectly.

How changes affect your mortgage protection insurance

Mortgage agreements usually span decades. From selling your home to switching your mortgage lender and paying off your mortgage, a lot can change over such a long period of time.

Here's how your mortgage protection insurance will be affected by various life changes.

• Topping up your mortgage: Topping up your mortgage refers to borrowing money against the current value of your home. If you do this, you can get new a mortgage protection cover for the amount, or for the top-up cost only. You may find that your new premium is higher or lower than the original amount, depending on any lifestyle changes you've made in the interim.
• Switching your mortgage: If you assign your mortgage to a new lender, your mortgage protection will switch over too. In case you have life insurance instead of mortgage protection, this cover will continue as normal.
• Paying off your mortgage early: If you do not have a mortgage, you will not need protection. In the event you pay off your mortgage early, make sure you cancel your policy with your provider to avoid making unnecessary monthly payments. You may be able to continue your mortgage protection for a longer period (for example, if it includes a serious illness cover you want to keep). But most lenders will automatically cancel your policy once the balance is settled.

Check out our first-time buyers hub to discover a wealth of resources that are tailored to help you streamline the entire home buying process.