Protect your monthly mortgage payments

Insurance policies which protect your income and mortgage payments have been slated in the past. But a new type of product is worth looking into...

I can't imagine there are many - if any - payment protection insurance (PPI) fans left outside the insurance industry. PPI policies can be used to cover debt repayments such as loans, credit cards and mortgages when you can't. Or, PPI can insure against loss of income if you're made redundant. But recently, PPI companies have been heavily criticised for charging overpriced premiums and regularly rejecting claims.  

But this has left us with something of a dilemma: How can you protect yourself against accident, sickness and unemployment when the insurance policies on offer aren't really worth the paper they're written on?

There are other accident and sickness policies on the market - such as critical illness cover and income protection insurance - which arguably do a better job than PPI, but neither protects against redundancy. And that's a pretty high priority for many of us in the middle of a recession.

Self-insure?

Until now I've suggested that avoiding rip-off redundancy cover by self-insuring is probably a better option. This simply means saving up a cash cushion of several months' salary so that, should you lose your job, there's an emergency fund ready and waiting.

But I've recently come across another policy which claims to knock the spots off traditional PPI and still provides protection against accident, sick and unemployment. 

It's called Mortgage & Lifestyle Protection and it is available from insurance company, LV=. Is it worth getting - and how is it different from traditional mortgage payment protection insurance (MPPI)?

The table below outlines the key differences between the two:

Traditional MPPI or IPPI versus Mortgage & Lifestyle Protection

Mortgage & Lifestyle Protection is only available through independent financial advisers and tied advisers at LV=

On the face of it Mortgage & Lifestyle Protection looks like a far superior product and appears to overcome many of the drawbacks of traditional PPI, such as the nasty policy exclusions, and the short-term nature of protection.

Is it competitive on cost?

We already know that PPI is pricey, but can LV= compete on cost? It's difficult to tell since the price depends on your own circumstances, but the example below will give you a rough idea.

Let's say a man aged 24 chooses accident, sickness and unemployment cover from LV= with the following protection:

• Level Mortgage Payment Protection of £500 per month payable for 25 years
• Index-linked Living Expenses Protection of £300 per month payable for 35 years to age 60
• A waiting period of three months

This amount of protection from LV= would cost £28.51 a month*.  If he chooses a waiting period of six months the cost drops to just £19.75.

*Assumes the policyholder has low-risk, non-manual occupation.

Independent PPI

PPI from an independent insurer is supposed to be cheaper than a policy sold to you by the same company which provides your mortgage, credit card or loan.

So let's compare the LV= policy to a policy offered by a well-known independent PPI provider, British Insurance.

For the same 24-year old man, monthly cover of £800 for an accident, sickness and unemployment policy would cost a shade less from British Insurance, at £28 a month. However, none of this cover is index-linked, so the amount of income available from British Insurance will not increase with inflation - like the living expenses element would with the LV= policy.

With both policies, any single claim for redundancy will only result in payouts for a maximum of 12 months . But if you claim for ill-health instead of redundancy, LV= will pay out until you're ready to return to work - whereas British Insurance's policy will only pay out for 12 months, whether you're fit to work or not.

That said, British Insurance will provide benefits after a waiting period of 30 days, while you'll need to wait three months before you receive any money from LV=. This could be a problem if you have no other cash to fall back on in the meantime. It is possible to buy a policy with a shorter waiting period, but this will push the premium up.

Overall, I would say if you need a new insurance plan, or you have an existing policy, it can't hurt to get a quote. LV= might be able to offer you a more competitive plan with more comprehensive cover. Alternatively, if you're not so worried about how you'd cope with redundancy but are more concerned about the financial fall-out if you suffer an illness or disability, you may be better off with critical illness cover or income protection. Find out more here.

More: Is unemployment cover up to scratch? | Don't make this mistake with your life cover

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