Mortgage Protection Insurance: What It Is and Do You Need It?

Buildings Insurance — The Only Compulsory Cover

Buildings insurance covers the physical structure of your home against damage — fire, flood, subsidence, storm damage, and accidental damage to fixed fittings. Your mortgage lender requires this as a condition of lending: without buildings insurance, you have no mortgage offer. Cover must be in place from the date of exchange of contracts (not completion), because you are legally committed to the purchase from exchange.

Most lenders allow you to arrange buildings insurance independently rather than using their own product. This is important — lender-arranged buildings insurance is frequently overpriced. Comparison sites (such as Compare the Market or GoCompare) typically return quotes 20–40% cheaper than lender-arranged products for equivalent cover. Your lender cannot refuse to accept your independently arranged policy provided it meets their minimum requirements.

The sum insured (the rebuild value of your property) should reflect the cost of rebuilding from scratch, not the market value. These figures can differ substantially — particularly for listed buildings or properties in areas where construction costs are high. The Association of British Insurers provides a free rebuild cost calculator. Underinsuring the rebuild cost can leave you significantly out of pocket if you make a major claim.

Life Insurance for Your Mortgage

Life insurance is not a legal requirement when you take out a mortgage, but it is strongly advisable for anyone with financial dependants. The two most common products for mortgage-holders are level term assurance and decreasing term assurance.

Level term assurance pays out a fixed lump sum if you die within the policy term. This is appropriate if you want to leave your family with enough to pay off the mortgage and have additional funds. Decreasing term assurance (also called mortgage protection life insurance) pays out a decreasing amount aligned with your outstanding mortgage balance. As the mortgage reduces, so does the payout — it is designed specifically to repay the remaining mortgage. Decreasing term is cheaper than level term for equivalent initial cover.

For joint mortgages, you can buy joint life assurance (which pays out on the first death and ends) or two individual policies (which each pay out independently). Individual policies are generally more flexible — they remain in force separately and can be assigned or continued independently if the relationship ends.

Critical Illness Cover

Critical illness cover pays out a lump sum if you are diagnosed with one of a specified list of serious illnesses — typically including certain cancers, heart attack, stroke, MS, and kidney failure. The payout is made on diagnosis, not on death, making it complementary to (rather than a replacement for) life insurance.

The payout can be used for anything — mortgage repayment, home adaptations, private treatment, or income replacement during recovery. Critical illness cover is more expensive than pure life insurance, and the definitions of covered conditions vary significantly between insurers — what one insurer covers as a 'heart attack' may be more or less broadly defined than another's. Read the definitions carefully, not just the list of conditions.

Whether you need critical illness cover depends on your financial resilience. If you have significant savings and sick pay entitlement from your employer, you may be able to self-insure for a period of illness. If your household relies on your income with limited buffer, the financial shock of a serious diagnosis without cover can be severe.

Income Protection Insurance

Income protection insurance pays a regular monthly income (typically 50–70% of your pre-illness earnings) if you are unable to work due to illness or injury. Unlike critical illness (which pays a lump sum on specific diagnoses), income protection covers any condition that prevents you from working — including mental health conditions, back problems, and long-term conditions not on a critical illness list.

There is a deferred period (the waiting period before the policy starts paying) — typically 4, 8, 13, 26, or 52 weeks. A longer deferred period means lower premiums. Align the deferred period with your employer's sick pay provision — if your employer pays full salary for 6 months then statutory sick pay, a 26-week deferred period makes sense.

Income protection is often considered the most important personal insurance after life cover for mortgage holders — because it protects your income (and therefore your ability to pay the mortgage) across any illness, not just a defined list. However, the self-employed and those without employer sick pay entitlement benefit most, as employed mortgage holders may have some protection through statutory sick pay and employer sick pay schemes.

Mortgage Payment Protection Insurance

Mortgage Payment Protection Insurance (MPPI) specifically covers your mortgage payment — not your full income — if you are made redundant or become too ill to work. Unlike income protection (which usually covers illness only), MPPI typically includes redundancy cover. Policies usually pay for 12–24 months maximum.

MPPI fell into disrepute in the 2000s following widespread mis-selling, where lenders sold overpriced, restrictive policies bundled with mortgages without proper explanation of the exclusions. Today's MPPI products are better regulated but still carry significant exclusions: typically, pre-existing medical conditions, voluntary redundancy, and redundancy within the first 3–6 months of taking the policy.

For many buyers, comprehensive income protection insurance is a better alternative to MPPI — it covers a wider range of scenarios, for a longer period, and for your full income rather than just the mortgage payment. MPPI makes most sense for buyers who specifically want redundancy cover in addition to illness cover, and who do not have employer redundancy protection.

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