One misconception roaming about is that you are required to take out life insurance when taking out a mortgage loan. While there is no legal obligation to purchase mortgage life insurance, some lenders may consider it a precondition when lending you money to buy a home.
So, although it's not mandatory to buy mortgage life insurance, you should still consider taking out a policy. In this article, we'll take a look at how it works and the types of cover available...
How it works
Mortgage life insurance is designed to help your loved ones cover mortgage repayments if you die before it's repaid. Upon your death, your insurer pays out a lump sum to your family.
Like any type of insurance, you pay monthly premiums to your provider each month. Failing to keep up with your monthly payments can result in your cover being ended early.
There are two main types of life insurance that can be used to cover mortgage payments:
Whole life insurance
Provides cover for the rest of your life. Your insurer pays a lump sum to your loved ones, regardless of when you die. Whole life policies are typically more expensive than other types of cover, as they guarantee a pay-out when you die.
The payout doesn't have to be used to cover a mortgage - for example, if it is already paid off when you die. It can help your family with future costs, such as:
Living costs
Household bills
Funeral expenses
Paying off outstanding debts
Leaving a legacy
Term life insurance
Unlike a whole life policy, term life insurance only covers you for a certain period of time (for example, 20 years). This makes it ideal for covering a mortgage, as you can set the policy length to how long you expect to finish repayments.
Term life policies only pay out if you die within the set policy term. If not, the policy expires and you won't receive any money back for the premiums paid into your policy. There are two types of term life cover used to cover a mortgage:
Decreasing term cover - The pay-out value of the policy decreases over the term of the policy. This policy type is popular with those who have repayment type mortgages.
Level term cover - both the pay out of the policy is fixed throughout the term of the policy. This policy type is popular with those who have interest only mortgages.
You can also get joint life insurance - this provides cover for two people under a single policy. A joint policy may be ideal if you and your partner share a mortgage and want to ensure the other has cover if one of you dies.
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What happens if I die before my mortgage is paid off?
A mortgage is one of the biggest payments most of us will make in our lifetime. However, if you die before your mortgage has been paid off, your lender will expect your family to continue making repayments. If your family is unable to make payments, they may be forced to sell their home to cover the cost.
That's why mortgage life insurance is a great way to reduce the financial burden placed on your family if you die. The policy pay-out amount can be tailored to the value of your mortgage. That way your family can clear the outstanding balance if you pass away
How much will mortgage life insurance cost me?
There are a number of factors that can affect the cost of your policy, such as:
Age
Health and lifestyle
Outstanding mortgage balance
Type of policy
Length of policy
If you're covering a mortgage, you should already have an idea of how much money is needed to protect your home. When you're ready to buy cover, you can get an online quote in minutes through our online form.
