Mortgage protection insurance vs income protection

If you’re a homeowner, your mortgage will likely be your biggest monthly expense. So it’s worth considering how repayments would be made were you to become seriously ill.

Mortgage payment protection insurance and income protection insurance are worth considering. But how do they work and is there any difference between the two? 

In this article, we explain:

• How income protection works
• Key facts of mortgage insurance
• Can you have income protection and mortgage protection?
• Which of the two should you choose?

What is income protection insurance?

Income protection is a form of personal protection insurance. It can help you feel financially secure in the event you are unable to work due to illness, injury or redundancy.

An income protection insurance policy will pay you a tax-free monthly income to replace lost earnings.

The money can be spent however you like – such as repaying the mortgage, funding childcare costs or other living expenses.

The policy won’t pay out straight away. There is typically a deferral period of at least four weeks before payouts start. This is because you may get sick pay from your employer, or you may be able to return to work quickly.

To hold an income protection policy, you pay a monthly fee (“premium”) to your chosen insurance provider.

The cost will depend on your annual income, age, your chosen deferral period, whether you’re a smoker and how long you want the cover to last.

According to figures from Drewberry Insurance, below are typical monthly costs for a non-smoker applying for a replacement income of £1,500 a month.

Occupation	Monthly cost age 25	Age 35	Age 45
Office role (eg accountant)	£24.05	£37.19	£58.32
Manual role (eg plumber)	£44.63	£68.99	£99.75

Key features of income protection insurance:

• Only pays a percentage of your normal salary – typically up to 60%. This is partly to incentivise you to return to work as soon as you can, and because the income is tax-free.
• Many policies are short-term, meaning you’ll get a monthly payout for up to two years.
• Long-term policies are available – meaning you could get a monthly payout until retirement age. However, these are less likely to cover redundancy and to only cover serious medical conditions.

For other considerations, check out: Critical illness cover vs. income protection insurance

Is it worth having income protection insurance?

The insurance can give peace of mind that you would be financially secure in an emergency.  

However, only 7% of adults in the UK have income protection insurance, according to figures from investment firm Schroders Personal Wealth.

This compares to 10% who have critical illness cover and 24% with life insurance.

Cost is partly the reason why income protection is less common. Income protection tends to be more expensive than critical illness and life insurance because it covers a wider range of circumstances and you are more likely to make a claim.

As an example provided by insurance broker Caspian, someone in their mid-30s can expect to pay an average of £21.08 a month for life insurance, £25.60 for critical illness and £29 for income protection. 

Ultimately, whether it’s worth taking out will depend on your own circumstances. If you are self-employed and would struggle to pay the bills if you became unwell, then it is worth considering. 

You may also feel it’s necessary if you are employed and your employer doesn’t offer generous sick pay. 

You may get access to statutory sick pay through the government if you’re too unwell to work. However, this is only £99.35 a week and is unlikely to cover all your household expenses.

What is mortgage protection insurance?

Mortgage payment protection insurance (MPPI) covers your mortgage repayments if you can’t work because of illness, injury or redundancy (although it has been difficult to get cover for redundancy during the coronavirus pandemic).

It differs from mortgage life insurance, which pays out a lump sum to your family if you die before clearing your mortgage.

Like income protection, mortgage payment protection insurance won’t pay out straight away. There will be a deferral period, typically between one and six months, before you start receiving payments.

The length of the deferral period will impact how much you’ll pay for the policy. The longer the deferral period, the less it will cost you. Some people choose a longer deferral period because their employer has a sick pay policy that pays above statutory amounts. 

Mortgage payment protection insurance is different from payment protection insurance (PPI).

• MPPI: Payouts are made directly to you, to pay the mortgage.
• PPI: Payouts are made direct to your lender, rather than you.

Key features of mortgage protection insurance:

• Can cover your mortgage payments in full, as long as this doesn’t exceed 65% of your gross annual salary.
• Available for both repayment and interest-only mortgages.
• Payouts tend to be short-term – up to two years – or until you return to work.

Find out more on alternatives to life insurance.

Should I have mortgage protection insurance?

A mortgage can be a big monthly expense, so it’s worth considering an insurance policy that would cover the repayments in an emergency.

Mortgage payment protection insurance can be taken out whether you are employed or self-employed.

If you are employed and your company pays a generous sick pay and redundancy package, then you may not feel mortgage payment insurance is worth it.

You may also not need it if you have a substantial amount of savings or a partner or family that could support you.

Is income protection the same as mortgage protection? 

Mortgage protection is a form of income protection insurance, and the two essentially work in the same way.

Income protection is designed to cover a percentage of your general income, and the payouts can be used towards household bills, the mortgage or anything else you choose.

Mortgage protection is specifically for your mortgage, so the monthly payout could be smaller. You can opt for cover towards the cost of some other bills, but providers typically cap the payout at 125% of your mortgage costs.

Income protection policies tend to pay out for a longer period of time than a mortgage protection policy. You could even get a monthly payout that covers you until retirement age.

Can you have income protection and mortgage protection?

There is nothing to stop you having both, but you’ll be paying for two policies. 

Both are designed to cover mortgage payments, but income protection can cover a broader range of lifestyle costs.  

A combined mortgage and income protection insurance product does not exist. 

You may, however, want to take out mortgage life insurance and mortgage payment protection insurance. 

The first would repay the mortgage if you die during the policy, relieving the financial burden for your loved ones. The second can cover mortgage payments if you become unwell or injured during the policy.

Find out information about mortgage life insurance.

Income protection vs mortgage protection – which should I choose?

Income protection is likely to be the better of the two. It covers a wider range of expenses, which means the monthly payout would be higher. But ultimately, which is better for you will depend on your individual circumstances.

You are also likely to receive a payout for longer. Mortgage payment protection policies typically pay out for up to two years, whereas a long-term income protection policy could give you a regular payout until you reach retirement age and can claim your pension.

The downside of income protection is that the monthly cost (premiums) are more expensive than mortgage protection insurance. 

So if cost is important to you, then mortgage protection insurance may be more suitable.

It is possible to combine life insurance with an income or mortgage protection policy. But in many cases they are bought as standalone policies.