People often assume mortgage protection and income protection are the same thing, or that having one means the other isn’t necessary. Neither of those assumptions is right.
The confusion isn’t surprising. Insurers and brokers use the terms inconsistently, and the two products are sometimes bundled together in ways that blur the line between them further.
But the difference matters, because these two types of insurance protect against different risks.
Mortgage protection covers the debt, while income protection covers the money that pays it. However, if you assume that one will cover what the other does, you could end up with a gap in your protection when you need it most.
This blog explains what each policy covers, how they differ and how to work out whether you need one or both.
What is mortgage protection insurance?
Mortgage protection insurance is designed to pay out enough to clear or reduce your mortgage balance if you die or, in some cases, if you’re diagnosed with a terminal or critical illness during the term of the policy.
Most mortgage protection policies use decreasing term cover, where the amount of cover falls over time, broadly in line with your outstanding balance on a repayment mortgage. Because the sum insured reduces each year, decreasing term cover tends to be cheaper than a level term policy, which pays out the same fixed amount regardless of when the claim happens.
For most homeowners with a standard repayment mortgage, decreasing term cover is the best match for what they need to protect. Level term cover still has its place, particularly if you’re on an interest-only mortgage where the balance doesn’t reduce over time, or if you want the payout to cover more than your mortgage alone.
What mortgage protection won’t do is help if you’re unable to work. It typically pays out only on death or, if the policy includes it, a critical illness diagnosis. So, if you break your back and can’t work for six months but aren’t terminally ill, this type of policy won’t provide a penny. That’s the gap that income protection is designed to fill.
What is income protection insurance?
Income protection insurance replaces part of your income, usually somewhere between 50% and 70%, if you’re unable to work due to illness or injury. It pays out monthly for as long as you’re unable to work, up to the end of the policy term, until you return to work or until you retire, whichever comes first.
A few details shape how income protection works. The deferred period is the gap between when you stop working and when the payments begin. A longer deferred period usually means a lower premium, but also a longer stretch with no income before your cover starts paying out.
The ‘definition of incapacity’ matters, too. An ‘own occupation’ policy will pay out if you can’t do your specific job, while an ‘any occupation’ policy will pay out only if you can’t do any job you’d reasonably be suited to, which is a much higher bar to clear.
Your occupation and health history can both affect the cost. Someone in a physically demanding or higher-risk job will usually pay more than someone at a desk, while any pre-existing health conditions can also affect the terms an insurer offers.
Unlike mortgage protection, income protection isn’t tied to your mortgage. It replaces income you’d otherwise use for anything, which can include your bills, food shop, childcare as well as your mortgage repayments. That breadth of options is part of why the two products get confused, when they’re built to solve different problems.
The key differences
Mortgage protection is triggered by death or, in some policies, a critical illness diagnosis. Income protection is triggered by an inability to work due to illness or injury, whatever the cause. That’s the first and most significant difference. One covers a fixed, defined event, while the other covers a far broader range of circumstances.
The way each pays out differs, too. Mortgage protection is designed to pay a lump sum or, in the case of decreasing term cover, an amount that tracks your outstanding balance, which clears or reduces the mortgage in one go. Income protection pays a monthly income for as long as you’re unable to work, rather than a single lump sum.
What you can use the money for differs as well. A mortgage protection payout is there to deal with your mortgage. Income protection replaces your income more generally, so it’s yours to use however you need it, mortgage included.
The cost differs, too. Income protection tends to cost more than mortgage protection for an equivalent level of cover. That’s largely because the likelihood of being unable to work due to illness or injury is statistically higher than the likelihood of dying during the mortgage term. So, if you’re off work for six months with a bad back, mortgage protection won’t help you at all, but income protection will replace part of your income while you recover. On the other hand, if you die unexpectedly during the mortgage term, income protection is irrelevant, but mortgage protection can clear the debt for the people you leave behind.
Do you need one, or both?
If you’re a homeowner with people who depend on your income, it isn’t really a choice between income or mortgage protection. They cover different risks, so you probably need them both.
Mortgage protection deals with what happens in the worst case. Income protection deals with illness or injury stopping you from working for a period of time.
Across most working-age groups, the chance of being unable to work due to illness at some point is considerably higher than the chance of dying during the term of a mortgage.
That doesn’t mean income protection should take priority. But for most people weighing up which to prioritise on a limited budget, the numbers point one way. Illness and injury can disrupt your household finances more often than death does, and income protection covers a wider range of situations as a result.
However, not everyone can afford to take out both policies at once. If you need to choose, or start with one and add the other later, that’s a reasonable way to approach it. Making a decision with a clear picture of what each policy does and doesn’t cover is what matters, rather than assuming one product does the job of both.
Why work with a mortgage and insurance broker?
Going direct to an insurer means seeing one provider’s products and underwriting criteria. An experienced broker, like FG & Cook, can give you access to a wider range of providers and, just as importantly, the experience to know how their underwriting criteria differ from one another.
If you have a pre-existing health condition or work in a higher-risk occupation, this matters, as one insurer might decline or load a policy that another would accept on standard terms. Without comparing the market, you’d have no way of knowing that.
We can also spot when a policy doesn’t match your situation, even if it looks fine on paper. For example, decreasing term cover payments on an interest-only mortgage will decrease over time, but the mortgage balance won’t, so the two will stop lining up at some point. That kind of mismatch isn’t always obvious until you need to make a claim and it doesn’t cover what you were expecting.
Protection also works best when it’s considered alongside your mortgage, rather than bought separately afterwards. A broker looking at your full picture, including your mortgage term, your repayment type and your circumstances, can recommend a level and type of cover that fits your circumstances, rather than a generic policy.
In practice, it starts with a proper fact-find to understand your situation, followed by comparing quotes across multiple insurers rather than a single provider. It doesn’t end once the policy is in place, either. As your circumstances change, whether that’s a new job, a growing family or a change to your mortgage, you should review your cover to make sure it still fits.
How FG & Cook can help
Mortgage protection and income protection get confused because the terminology is inconsistent and the products are often sold alongside each other. But they cover different risks, and assuming one does the job of both is one of the most common, and most avoidable, gaps in people’s cover.
At FG & Cook, protection advice is part of every mortgage conversation we have. We start by understanding your mortgage, your circumstances and what you’d need to fall back on, before comparing policies across the market to find cover that fits. That might mean mortgage protection, income protection or both, depending on what your situation calls for.
Book a consultation with our team today, and we’ll talk through your mortgage and protection needs together and recommend what fits your circumstances.