Mortgage protection life insurance
12 Oct 2021
Many people think that buying a life insurance policy or mortgage protection policy is something you have to do when taking out a mortgage - this isn’t true, but some lenders do insist upon it, and it can help bring you a little peace of mind. After all, the outstanding mortgage debt is £215,000 in London and £79,000 in the North East. If you passed away, you’d be leaving that debt to your family. If covering your mortgage is your main concern, there are options for you.
Of all the types of insurance you can buy, mortgage related policies can seem the trickiest. But never fear, here at LifeSearch we can help make it a little easier. The most important thing to consider is whether you want a life insurance policy that helps to cover your mortgage, a policy just for your mortgage, or both.
Life insurance for a mortgage
A standard life insurance policy isn’t just to cover a mortgage. You can take out a policy where the pay out will more than cover your mortgage amount, and the money can be used to ensure that your loved ones get to continue living their lives the way that they love, not just continue living in their home. If you have people relying on you for more than just the mortgage repayments (think car or school payments) then perhaps a life insurance policy that will cover more than your mortgage is your best bet.
Your life insurance policy can be bought at any time throughout your life. You can buy cover that lasts until you die, or fixed term cover where you can choose how long your policy lasts. Most people choose to buy term cover that will last until their mortgage is paid off, or until their children are old enough to be self-sufficient.
Term life insurance is one of the most commonly bought types of life insurance. It covers you for a specified amount of time or the ‘term’ of the policy. You choose the length of your term when you buy your policy. This could be up until your mortgage is paid off or until your children become financially independent, and your financial responsibilities lessen.
You have two options for term life insurance.
The first is level term life insurance. You pick a time period for your cover to last, and your payout will be the same no matter when you make your claim in that period. If you have an interest only mortgage, this is a great option.
The second is a decreasing term policy - where the level of cover reduces over the term of the policy. The drawback of this type of policy is that it may not be able to leave your family with an additional lump sum once your mortgage has been paid off, as you’d be able to with level-term life insurance. Sure, you’ll be able to leave behind enough to cover the mortgage, but if you want to be able to help out with other expenses or leave a little extra spending money, then level term cover may be worth considering. This type of protection is cheaper, as the risk to the insurer decreases over time. If you have a repayment mortgage, this would be a great choice for you.
If you want to receive a payout no matter when you pass away, term life insurance may not be right for you, as your policy will expire at the end of the term and you’ll receive no pay out. Whole of life insurance might do the trick for you in this case. Whole of life insurance guarantees a lump sum pay out to your loved ones when you pass away, rather than within the confines of your term. This is a more expensive option, but you’re guaranteed a pay out.
Any of these options could work for covering your mortgage if you plan right when you buy them. To make sure you’re covered how you want to be covered, consider speaking to an advisor, like us here at LifeSearch.
So… what’s Mortgage Protection Life Insurance?
There are a lot of ways you can buy a policy that covers your mortgage, but mortgage protection life insurance is designed specifically for that purpose, and is typically taken out when you take out your mortgage.
It works similarly to a decreasing term life insurance policy, in that your level of cover will decrease over time, in line with a repayment mortgage. This is why Mortgage protection life insurance tends to be cheaper than a standard life insurance policy, as the risk of a large payout decreases over time.
If you pass away over the course of the policy, you’ll receive a lump sum payout that can be used to immediately pay off the outstanding amount of your mortgage. The policy isn’t directly linked to your mortgage, so when you receive the payout it doesn’t have to be used for the mortgage if you find there are more important financial issues to settle.
If your mortgage amount changes, you re-mortgage, or you move house, you’ll need to update your policy to reflect this in order to be covered how you want to be covered.
If a mortgage is your only big financial commitment but your partner still relies on your income to pay it, mortgage protection cover might be a better fit for you than a catch-all kind of life insurance.
We know it can be overwhelming so many possibilities to consider when you’re looking for cover for your mortgage. Contact the LifeSearch team now, you can call us on 0800 316 7253 or alternatively fill out this form and we will be in touch. We can help you to achieve some clarity about the options that would be best for you.