This section looks at the events that can trigger a benefit being paid, and what type of benefit may be payable.
Life, accident and sickness and unemployment covers are the most common to be found in a mortgage protection policy. Other covers such as critical illness and hospitalisation cover may also be found but are less common.
There will be different levels of benefit for each type of cover. These will vary from benefits providing regular payments up to a set maximum number and a single sum once only benefit.
On some covers mortgage protection benefit payments may not be paid until the customer has been able to work for a minimum period of time. This is known as a waiting period and is explained further on.
Each of the main covers is described below.
Life cover
This benefit is triggered if the customer dies during the term of the mortgage/insurance. The benefit will normally be the outstanding balance of the mortgage (excluding non payment arrears). Insurers may set a maximum limit that can be insured and this would normally be higher than most mortgages. Obviously as the policy is tied to the mortgage the maximum payable amount would not exceed the mortgage balance.
Accident and sickness cover
This benefit is paid when the customer is unable to work due to accident or sickness. The benefit may be set at a fixed amount per month or as a percentage of the outstanding amount of the loan (excluding non payment arrears). There will be a policy limit which will usually be set at payments continuing for 12 or 24 months or until the loan is completed. The period does vary and the customer may be given the choice of benefit period when they take the policy out. The longer benefit period costing a higher premium.
Unemployment and redundancy cover
This benefit is paid if the customer involuntarily loses their job. There is a difference between redundancy and unemployment. If the cover is restricted to redundancy then the cover would only pay if the customers employer has issued a formal notice of redundancy.
If the policy covers unemployment then a wide range of unemployment causes are covered. Examples include self employed persons who are forced to close down their business and for employees where the loss of the job is less formal than redundancy but does not extend to dismissal.
The benefit is usually paid as either a fixed amount per month or as a percentage of the outstanding balance of the loan (excluding any non payment arrears). Policy limits can vary but a twelve month maximum limit on benefit payments is common.
Critical illness
The benefit is paid if the customer is diagnosed with a specifically defined illness or condition from a pre-defined list during the term of the loan. The pre-defined list differs but may include items such as cancer, heart attack, stroke, major organ failure and renal failure.
The benefit is usually a single payment based on the outstanding balance of the loan/mortgage excluding any non payment arrears. The insurer will set a maximum amount they will insure as benefit which normally would exceed the customer’s insurance needs.
Hospitalisation
The benefit is paid if the customers is admitted to hospital and remains there for a minimum period which would usually exceed 3 to 5 days. The benefit is a set amount per day for a set number of days and benefit may not be paid for the first few days.