Mortgage Protection

Mortgage Life Insurance

Mortgage life insurance will ensure your family can repay the mortgage in the event of your death. Also referred to as decreasing term life insurance.

Why should I take out mortgage insurance?

Your mortgage is almost certainly the single largest financial commitment you have every month. And if you were to die unexpectedly, the family and dependants you leave behind would still be responsible for continuing to make these payments.

Having such cover in place provides peace of mind, knowing that your family and dependants won’t be forced into an unwanted change of lifestyle.

Different types of policy

There are three different kinds of mortgage life insurance to consider.

These plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

Decreasing term insurance

Decreasing term life insurance for mortgage cover is a type of policy where the payout sum reduces in line with your total mortgage debt. The term of your policy will match that of your mortgage – so if your mortgage term is 25 years, your policy term will also be 25 years.

If, however, you died 20 years into a 25-year term, the amount you still owed on your mortgage would have reduced. So if you still had £15,000 remaining at this point, the policy would pay out £15,000 in the event of your death.

This kind of policy is suitable for people with repayment mortgages, who repay their mortgage debt off over the term of their deal – not for those who have interest-only mortgages.

Level term insurance

Level term mortgage life insurance is easier to understand. The sum assured stays fixed throughout the duration of your mortgage – so if you take out a policy for £150,000, that’s the amount the provider will pay out regardless of when you die; one year or 20 years in, the amount is the same.

The obvious benefit with level term insurance is that your dependants will usually receive more funds than are needed simply to pay the remainder of the mortgage off, depending on when death occurs.

Because the sum doesn’t decrease over time, monthly premiums are higher than for decreasing mortgage life insurance.

Whole of life insurance

A third option is something known as a whole of life insurance policy. This pays out whenever you die, so instead of a fixed term policy – which typically lasts for 25 or 30 years – cover is continually provided.

Because there is no set term and the cover could potentially span several decades, monthly premiums tend to be higher than with fixed term policies.

Premiums are also linked to investments, so if investment growth is lower than expected, your premiums can increase substantially over time.

Ultimately, the amount you pay for your mortgage life insurance every month will be defined by a number of factors, including the size of the cover you need and the length of time you want the policy to run.

Your age and health will also be taken into consideration. If you are a heavy smoker or have suffered with a serious health condition in the past, your premium is likely to be higher than a non-smoker or an individual with better health.