Widespread confusion over the difference between Mortgage protection insurance and Life Insurance.
Customers confused over the difference between Mortgage Protection and Life Insurance
Our Life insurance division is one of the largest independent providers of mortgage protection insurance in Ireland. Most of our customers are first time buyers. In addition to first time buyers for whom we arrange mortgages and all related insurance products we also look after thousands of customers who have dealt directly with a lender for their mortgage but who come to us to arrange better value life insurance.
One of the first questions we need to ask is ' Are you sure you want to take out two separate policies or are you going by your banks check list?' The answer is usually 'I don't really know what I need, but yes my check list has both!'
First things first, Mortgage Protection IS a Life Insurance policy which has been specifically designed for mortgages, another name for Mortgage Protection is Decreasing Term Protection and this is how it works:
John is taking out a mortgage for €200,000 over 20 years. He is looking for a policy that will pay off the mortgage in the event of his death. He takes out a Mortgage protection policy with a starting value of €200,000, this value will reduce in line with his mortgage over a 20 year term. John dies 10 years into his mortgage, his insurance policy now equals what's left on the mortgage and it is paid to the bank. John's mortgage has now been cleared.
If you think about it, why would the bank need any more than that? They only need to know they will be paid what they are owed in the event of a death. So why do they ask for Life insurance as well? Separating them on the check list makes it look like Mortgage protection and Life Insurance are two unrelated products which can be confusing. The 'Life Insurance' they speak of is actually 'Level Term Protection' (Remember Mortgage Protection is call Decreasing Term Protection). Level Term Protection is another type of life insurance policy where the amount you're insured for does not decrease over the term of the policy. It is your choice to take this type of policy (level term insurance) in addition to mortgage protection, or as an alternative to mortgage protection; it will give you that extra bit of cover. This policy will pay out a lump sum in the event of death rather than just what's left on the mortgage.
Example using Level Term Protection for a mortgage:
John and Mary are taking out a mortgage for €300,000 over 30 years. The mortgage protection is coming in cheaper but they want some extra cover for themselves so they go with Level Term Protection. 15 years into the mortgage Mary dies and there is €150,000 left to pay on the mortgage. The Term Protection policy pays out a lump sum of €300,000. The bank takes the €150,000 that they are owed and the surplus amount of €150,000 is paid out to John as a form of life insurance.
It's up to you if you want Mortgage Protection, Term Protection or both!