Updated 03 December 2020
Taking out a mortgage is one of the biggest financial decisions you can make, and it ties you in to a potentially decades-long commitment. Your life is likely to change substantially in the time it takes to pay off your mortgage. You might have kids, who then might have children of their own and you could change jobs and move house. You may also develop an illness that puts your ability to pay your mortgage at risk. Mortgage life insurance covers your payments if you or your spouse should die. Here is everything you need to know about this kind of insurance.
The death of a major earner can have huge financial implications for a family, particularly when it comes to ongoing debt obligations like a mortgage. A mortgage life insurance policy will pay out in the event of the policy holder’s death, so that their spouse and/or dependents can pay off the mortgage. It ensures that loved ones don’t risk losing their home on top of the stress of bereavement.
Depending on the kind of policy you take out, if you die then your family will receive either a fixed lump sum or enough to cover the outstanding balance of the mortgage, however much it might be at that time. If your family needs to make a claim, this brings the policy to an end. Of course, it is possible to pay into the policy for your entire mortgage term without needing to use it. This is your best-case scenario (since it will mean you haven’t died), but you won’t be able to claim any payments back.
If you have dependents or are married, cohabiting or are in a civil partnership, it is important to be sure that your mortgage payments can still be made if one of the main earners was no longer there. If you are single with no partner, children, elderly relatives or other dependents, you may not need this kind of insurance. Landlords should also be fine without it as the mortgage will usually be covered by the tenants’ rent, and the property is likely to be sold if the owner dies.
Having mortgage life insurance is not necessary for taking out a mortgage. However, it is strongly recommended that you have some form of protection in place to make sure that your mortgage can continue to be paid if you should die. If your family is not able to keep up with payments, they may be forced to sell the home and move out.
When searching for a mortgage life insurance quote, there are a few details you should be aware of. The premium you pay is going to depend on a number of factors, including:
In 2019, the average cost was £16.53 a month for a single life insurance policy, but the premium you pay will depend on your risk factors, level of cover and specific provider. An independent financial advisor (IFA) will be able to find you an exact quote for your circumstances.
For many people, the answer is a resounding yes. This is mainly because it is hard to put a price on knowing that you have significantly reduced the financial stress on your family if you should die. Simply knowing that they will continue to have a roof over their heads can provide considerable peace of mind, particularly if you work in a dangerous profession.
The average amount of cover for a single term, decreasing cover life insurance policy is around £150,000. The amount of cover you need though, could be more or less than this. While you are thinking about how much cover you actually need, it is worth looking beyond your mortgage and thinking more holistically about your financial situation.
For example, your mortgage may be your biggest expenditure over the length of the policy. But it may not be your largest monthly expense. Your childcare and education costs need to be considered as well, as do your other debts. Will your partner be able to work full time in your absence? Making sure your family are financially protected means taking a look at the wider picture rather than just focusing on your mortgage.
There are two main kinds of mortgage life insurance for you to consider. Firstly, decreasing term life cover will pay out what is left to pay on your mortgage. This usually makes it the cheaper option as your mortgage debt decreases over time and your dependants will need a smaller pay out the longer the policy lasts.
Level term cover, on the other hand, pays out a lump sum if you should die within the fixed term. This tends to make it more expensive as the pay-out remains the same over the course of the policy term. When choosing the right type of mortgage life insurance for you, it is important to consider your regular living costs and what the shortfall in income might be if your salary is no longer available.
Working out the level of cover you need and whether to go for a decreasing or level term policy can be complex. Because for most of us, we will only deal with this kind of insurance policy once or twice in our lives, it can be really valuable to have someone who is experienced in all things insurance to guide you through the process. This is where your IFA or mortgage broker comes in. They will be able to help you find an exact quote, taking all of your relevant circumstances into consideration. If you are in any way uncertain about the level of cover you need from your mortgage life insurance policy, seeing an IFA or mortgage broker should be your first step.
One part of taking out a mortgage life insurance policy that many people do not consider, or are not aware of, is the tax implications that arise should you die. Your life insurance is considered to be part of your estate, meaning that your family may have to pay inheritance tax on it. It is usually possible to avoid this by writing the policy in a trust. If you do this, the insurance pays out directly to your dependents and is never part of your estate. Most policies will give you the option to do this for no extra charge, but it is still worth consulting your IFA if you are unsure.
Another important thing to consider is whether you want two single policies or joint cover. While a joint policy will tend to be cheaper than taking out two single ones, there will still likely only be a single pay out on the death of the first policy holder. So while two single policies are typically more expensive, you are guaranteed to get two pay outs when each of you dies. Another factor is that if your relationship breaks down, you will have to cancel your joint policy whereas both parties can continue as is if they have a single policy each.
Critical illness cover is usually an optional addition to your mortgage life insurance, and it pays out a lump sum if you are diagnosed with a serious condition or have a life-threatening incident like a heart attack. You get a tax-free lump sum to help you cover the cost of living.
Taking out critical illness will mean higher premiums, and not all providers cover the same list of illnesses and conditions. Reading the small print is vital for making sure you have the right cover in place. Also, be honest about any underlying illness you have or that run in your family. If your insurer proves you did not disclose it, you could end up with no pay out at all.
The main difference between these two common types of insurance is that decreasing term mortgage life insurance policies are designed specifically to help you pay an ever-diminishing level of debt. Life insurance policies tend to pay out a lump sum regardless of how long you have had the policy, and your premiums will likely stay the same for the entire policy term.
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