A home is much more than just bricks and mortar, many of us will spend our very best times under the same roof as our loved ones. But such as life, nothing comes cheap and mortgages can take many years to pay off. This helpful guide aims to help you understand mortgage life insurance and why you may need it.
So, what is mortgage life insurance?
What is mortgage life insurance?
Mortgage life insurance is designed to help you pay off your mortgage or any other debts and loans you might have outstanding. When you die, your insurance provider pays out a cash lump sum to your loved ones to help with repayments for a mortgage.
Nobody wants to leave their family with a mortgage to pay off. Therefore, this policy provides your loved ones with financial protection if you pass away during the policy term.
There are two types of mortgage life insurance - decreasing term & level term. These types of term life insurance cover you for a set period of time (i.e 20 years). In this case, your policy term should reflect how long you expect to finish making mortgage payments.
- Decreasing term is usually the cheapest and most popular option. This is where the pay-out decreases over time as you begin paying off your mortgage, but the cost of the monthly premiums remain the same. It's useful for paying off other debts and loans that you don't want to leave your family to deal with when you're gone.
Level term cover is usually the more expensive option. This type of policy pays out a fixed amount no matter when you die during the term and can be used to cover the remainder of the mortgage. Level term insurance is a popular option amongst those who have an interest-only mortgage, easing the financial burden on their loved ones.
Another type of life cover that can be used to pay off a mortgage is whole life insurance. This type of cover is often the most expensive option for protection. A whole life policy covers you for the rest of your life, paying out a cash lump sum when you die.
Unlike term life insurance, it pays out regardless of when you die. Your family can then use this money towards mortgage repayments and other costs.
When you buy mortgage life insurance you pay your insurance provider fixed monthly premiums for the length of the policy. If you were to become terminally ill or die, the remainder of your mortgage will be paid off (check your chosen providers policy documents for further information and terminal illness definitions).
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Do I need mortgage life insurance cover?
Purchasing a house is a massive financial commitment, so it's always best to get protection. Before buying life insurance it's worth considering what you need cover for. Life insurance not only covers a mortgage but can also support your family with:
Paying for childcare and education costs (for example university or school fees)
Help towards living costs
Paying off outstanding debts like loans and credit card repayments
Helping to cover the cost of your funeral
If you already have a life insurance policy, you may not need mortgage life insurance. Your current insurance pay-out could already be used to cover mortgage repayments. If you are unsure whether your current life insurance arrangements are still right for your needs, why not consider speaking to an adviser.
It's also worth checking with your employer if they offer a death in service benefit. It can give your loved ones financial support if you were to die whilst employed by the same business. It is possible to have multiple life insurance policies, though it obviously comes at an extra cost.
Critical illness cover can also provide you and your family with protection if you’re diagnosed with certain illnesses and medical conditions of specific severities. Not all providers will cover the same things, so it's important to check the policy summary of your chosen insurance provider to understand what you may be covered for and in what circumstances.
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The cost of mortgage life insurance
The cost of your policy depends on a few factors as well as your circumstances. When you apply for life insurance, your provider will ask you about:
Your age
Your current health and medical history
Your family medical history
The type of cover you need
The amount outstanding on your mortgage
Your job and salary
The main thing to take from this is: the younger and healthier you are, the less you are likely to pay towards your monthly premiums.
Another thing to consider is how much your loved ones depend on you financially. If you’re confident your family won't require a large amount of cover, you can lower the pay-out amount and therefore save costs on premiums.
You can also ensure that the payout is financially protected by putting your policy into trust. By doing this, you protect the value of the payout from being hit by inheritance tax, as the payout won't fall into your estate so isn't taxed when your family inherits it. For more information, you can visit our article about Writing your policy in Trust.
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Single or joint mortgage life insurance?
In some cases, a joint life insurance policy can work out cheaper. If you and your partner both contribute towards a mortgage, then it might be worth taking out a joint policy to protect you both if the other dies. This can be offered by some insurance providers and can work out easier to manage and cheaper than taking out separate policies.
This type of policy comes in two forms - first death & second death. With joint life first death, the policy pays out when the first person dies. Once this happens the policy ends so the second person may still want cover. With joint life second-death, the policy pays out after both policyholders have died.
Pros and cons of mortgage life insurance
Like most things, there are always pros & cons to consider. With mortgage life insurance, you need to take your circumstances into account to find the best policy for you and your loved ones. Before you do this though, you should be aware of the benefits & negatives of this type of policy:
Pro: The monthly premiums for decreasing term mortgage life insurance are usually cheaper when compared to the other policy types.
Con: Though the premiums are typically cheaper for decreasing term mortgage life insurance, the pay-out decreases as you pay off your mortgage. So, your loved ones could end up with a lot less than hoped for to help with costs besides the mortgage.
Pro: Mortgage life insurance can be put into trust, preventing the payout to your family from being hit with an inheritance tax.
Con: If you choose a decreasing term mortgage life insurance policy, it may not be suitable if you have an interest-only mortgage. Level term works well if you have an interest-only mortgage but is also more costly than decreasing term.
Finding the right policy for you
At Cavendish Online, we’re dedicated to helping you find the right policy for you and your family, for the best price - whatever your circumstances. Get a quote in minutes by filling out our easy-to-use form.
Or, if you require assistance and advice, speak to one of our dedicated specialists who are ready to support you on your life insurance journey.
