Not the most exciting of purchases, mortgage protection and life insurance are definitely up there with car tax on the list of necessary evils! Lots of us even out off buying mortgage protection or life insurance simply because we don’t understand what type of policy we need, and when we need it.
When buying a home, you will probably hear the term ‘mortgage protection’ or ‘mortgage insurance’ banded around a bit. But is this the right type for you? Or do you need separate ‘life insurance’ to cover all eventualities? There are certainly pros and cons to both, but to make things a bit clearer, here is everything you need to know about life insurance and mortgage protection.
What is mortgage protection?
Mortgage protection is essentially a name given to a life insurance policy that is specifically taken out to protect your loved ones in the event of your death during the term of your mortgage.
Research has shown that less than 48% of homeowners are insured against illness, injury or death.
The policy pays out a decreasing sum of money during a chosen time frame (term). The term is the number of years that can be specified when you take out the policy. The term usually matches the term of the mortgage. If you die during the term then the policy will pay out the decreasing sum (which is designed to fall in line with the reducing mortgage debt) tax free as a lump sum.
What happens if I die outside the policy terms?
If you die outside the terms of your policy then no money will be paid out. If you set the term of the policy to end at the same time your mortgage is repaid then the policy simply ends. There is no return on the premiums paid and there is no investment value at all. At this point you would be left without life cover and of course you would also be older so the cost of buying new life insurance at this point would be more expensive. It is therefore worth carefully considering your life insurance needs beyond the point at which your mortgage is repaid.
I have an existing insurance policy but I have recently bought a new house.
Will my cover need to change?
If you already have a mortgage protection policy when you come to buy your new home then it’s extremely important that you see what coverage you have and how much difference the purchase of your new home will make to your policy needs.
What is life insurance?
Life insurance offers a relatively low cost and straightforward way of ensuring that the financial needs of your family or any other dependents are met in the event of your death.
Life insurance pays out a lump sum of money in the event of your death. The policy will usually pay out no matter what the cause of death – natural, medical, accidental or through suicide – as long as personal details are provided honestly when the insurance is taken out.
It is usually essential for the parents of school-age children to have life cover, and this requirement becomes even more urgent in the case of single parents. Couples without dependents will usually still wish to protect their partner, and some people simply want an inexpensive policy which will ensure that their funeral costs can be met.
The two most popular types of life insurance are level term assurance and decreasing term assurance:
What is level term assurance?
Level term assurance pays out to your dependents if you die within a fixed term which is chosen by you – 25 years, for example. The premiums stay the same – as does the pay-out whether you die on the first day or the last day of the policy.
What is decreasing term assurance?
Decreasing term assurance is when the pay-out decreases over the policy term, usually in line with a loan.
We hope this information has been useful. If you need more help making a decision on your mortgage protection needs call us today on 01656 332 600.