We often associate life insurance with protecting something valuable, including our family home. Whether you already own a house or you're looking to buy, you may be wondering, 'do I need life insurance for a mortgage?'.
The truth is, you may not live to see your mortgage paid off, which could leave your family facing financial hardship. That's why it's important to consider what would happen if you were to die unexpectedly. Read on to learn why you may need life insurance cover for a mortgage.
Mortgage Life Insurance is designed to pay off mortgages when you die. It’s commonly purchased as a decreasing term life policy for those with a repayment mortgage. Like any type of life insurance, the policy pays out a lump sum if you were to die.
It can ensure that your loved ones will be able to keep your home if you pass away unexpectedly before your mortgage has been paid off. This way, they won’t have to worry about making payments they possibly can't afford.
The main benefits of owning mortgage life insurance
There are two main reasons why you might want to purchase life insurance:
- It provides financial protection for your loved ones.
- It can help them pay off your mortgage after your death.
If your mortgage has already been paid off after taking out mortgage life insurance, your loved ones can use the money towards other payments, such as living expenses, funeral costs, paying off credit card debt and other outstanding debts.
It can also act as an inheritance for your children, perhaps helping them buy a home of their own. Should you decide you no longer wish to keep the policy, it can be canceled without incurring any fees. Please be aware that your cover will stop once your policy is cancelled.
Should I get term or whole life insurance?
When it comes to buying mortgage life insurance, there are two main types of cover available to you - whole life insurance (also known as life assurance) and term life insurance. While both types of policies can be used to cover a mortgage, there are a number of differences between them.
Decreasing term life insurance
Decreasing term cover is often used to provide mortgage life insurance. This is because, unlike other types of cover, it is designed specifically to cover a mortgage and other significant loans. As the outstanding amount on your mortgage decreases over time as you make repayments, the death benefit under this type of cover also decreases, but aims to be enough to pay off the mortgage.
However, as it is a term life policy, cover only lasts for a set amount of years - this will be the amount of time in which you expect to repay your mortgage within. For example, if you have a 30-year mortgage, then the term of your policy should reflect this. If you survive the term, the policy expires, and you won't be owed any money for the premiums paid during this time.
Although a decreasing term policy is typically used to clear mortgage debt, the payout doesn't necessarily have to be used for that purpose and your family may choose to use the money to cover other various costs or purchases.
Decreasing term life insurance is one of the most affordable types of life insurance available on the market and is typically cheaper than both level term life insurance and whole life insurance.
Level term life insurance
Just like decreasing term, level term cover lasts for a set amount of years, however the death benefit remains fixed throughout the policy. As with any type of term cover, it only pays out if you die within the agreed policy term.
If you survive the term, the policy expires, and you won't be owed any money for the premiums paid during this time. Therefore, because a payout is not guaranteed, level term life insurance is often cheaper than whole life cover. Another benefit of level term life insurance is that as your mortgage will decrease over time with repayments, your level term life insurance policy will remain the same and the difference can be used for a host of costs.
Can I get cover for more than one person?
Is it a legal requirement to have life insurance for a mortgage?
While there is no legal requirement to take out life insurance for a mortgage, some mortgage providers will advise you to do so. The most common reason why lenders want to see a life insurance policy is because they want to ensure the mortgage can be repaid in the event of your death.
If you die before the mortgage is repaid, your lender will still expect your partner or spouse to make repayments.
In some cases, mortgage providers might not allow the mortgage to remain in place, with only one person left making the repayments. In this case, the remaining balance would need to be paid in full in order to retain the property.
So do you need life insurance for a mortgage?
We certainly think so! If you're ready to apply for cover, simply use our online quote service. We'll help you compare affordable policies from leading providers, so you can get the best rates available. If you require further assistance, get in touch with one of our specialist life insurance advisors.
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