Purchasing a home is an exciting time in a person's life. However, once you buy your home, you may start to receive adverts prompting you to insure your mortgage.
Before you opt into any kind of Life insurance policy, there are some things worth considering... Let’s take a look!
In this Article:
What is a mortgage life insurance policy?
Why buy mortgage life insurance?
How much is mortgage life insurance?
Alternatives to mortgage protection insurance
What is a mortgage life insurance policy?
So, you’ve just bought a house? If so, it's more than likely that you had to take out a mortgage to pay for it. These are issued by loan providers like banks and building societies, then you make monthly payments over time to pay them back.
In simple terms, mortgage life insurance (also known as mortgage protection insurance, decreasing term life insurance or mortgage protection life insurance) works similarly to that of traditional life insurance.
The purpose of such a policy is to reduce the financial burden on your family in the event of your death. Should you pass away within the term of the policy, your family will receive a lump sum, which they can use to pay off the outstanding mortgage balance on your house.
With this type of life insurance, as you pay off your mortgage the eventual pay-out decreases over time. Note that the sum assured on a decreasing term policy is not usually directly aligned to the outstanding mortgage balance it is covering. Instead, the sum assured will reduce at a certain interest rate every year (usually between 6% and 8%) meaning that if your mortgage has an interest rate higher than this, then the policy may not clear your total debt.
Conversely, you could chooselevel term life insurance. The great thing about this policy is that whether you die in the first or last year of your policy term, your family will receive the full sum assured as the cover amount remains the same throughout coverage, your family still receives the maximum pay-out.
Check out - ‘When is the right time to buy life insurance?’ for more information.
There is an alternative type of insurance for a mortgage called mortgage payment protection insurance (MPPI).
Unlike mortgage life insurance, this policy covers your monthly mortgage payments if you lose your job or become ill, lasting between 1 or 2 years.
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Why buy mortgage life insurance?
Buying a house isn’t just about having your own place to live, it’s also an investment that requires protection.
Though it’s not legally mandatory, it is recommended that you opt to purchase life insurance for your mortgage. Depending on the loan provider, some may require you to have an insurance plan in place as a condition of their mortgage offer.
Nobody wants to leave their family to pay an outstanding mortgage balance. Instead, what they really need is peace of mind for the future ahead.
Whether you choose to buy mortgage protection insurance or not can depend on if you have others to provide for. If you’re a single homeowner, you may be less likely to need to take out a mortgage life insurance policy.
Other insurance options could be beneficial, like mortgage payment protection insurance, as these pay towards your mortgage should you lose your job or become too ill to physically work.
If you want a solution for coverage of more than just your mortgage, you may also consider purchasing level term life insurance. This can help towards:
Living costs – to help your family cope financially
Childcare and education costs
Outstanding paymentsyou may have - such as loans or credit card debt
Funeral costs
How much to consider when buying mortgage life insurance for cover?
When applying for mortgage life insurance, certain factors can affect the cost of your policy, like:
Age (The older you are, the higher premium payments will likely be)
Health (Poor or severe health disclosures can increase costs or mean you are unable to secure medically underwritten cover)
Lifestyle (You may pay more for premiums if you smoke, or if you have a hobby the provider considers hazardous)
Occupation (High-risk jobs can raise costs)
Mortgage amount owed (A high outstanding mortgage balance will increase the cost of the policy)
Another factor to consider is whether to buy a single or joint policy for you and your partner. Sometimes it can work out cheaper buying joint policies, however, two separate policies can result in double pay-outs.
Alternatives to mortgage protection insurance
In some cases, mortgage protection insurance may not be the best approach. Perhaps you require longer-term protection or cover for health issues?
Fortunately, alternative solutions are available:
Life insurance
Life insurance, similar to term life insurance allows your family to spend the money where they see fit. Though, unlike the latter, there is no fixed limit. You also have the option to specify how the money is spent, for instance, on mortgage payments.
With this type of insurance, you’ll receive a tax-free lump sum, if you become seriously ill or disabled. The payment is to help with living costs including your mortgage loan. Your provider will state what illnesses or disabilities you’re covered from.
Another option is income protection insurance. This usually gives you around half or two-thirds of your usual salary if an accident or illness prevents you from working. It can provide you with a salary until you’re able to return to work, retire or if the policy ends.
Help from the Government
If you run out of options, the Government may support you in paying your mortgage. You can seek Jobseeker’s Allowance and Employment and Support Allowance if you’ve been made redundant or cannot work.
There is also the Mortgage Interest Scheme (SMI) – The Government will pay some or all of the interest on the first £200,000 of the mortgage[1]. Sadly, with these schemes, there isn't always a guarantee that you will be eligible to apply.
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