Mortgage Protection Life Insurance
Mortgage Life Insurance is similar to a standard Personal Life Insurance policy with the exception that your cover is tied to your mortgage loan. It is designed to pay out a lump sum that can repay your mortgage in full if you pass away.
Mortgage Life Cover is intended to cover the entire cost of your mortgage loan, so it will usually pay out a lump sum large enough to pay off what is left of the loan in one payment.
Being tied to your mortgage, it is also typical that the policy’s end date is set as close as possible to the expected day that you pay off your mortgage.
Cover Types
There are two specific types of Mortgage Life Cover that you will need to choose from when taking out your policy. The type of covers are designed for different types of mortgages and so act differently while you have them.
Decreasing Term Life Insurance
If you have a principal repayment mortgage loan, Decreasing Mortgage Life Cover is usually the most suitable option. With such a plan, the level of cover declines over time aligning with the amount outstanding on your loan, eventually reaching zero at the end of your policy when you have officially paid off you mortgage.
One thing to be aware of when purchasing decreasing cover, however, is the decrease rate of your Mortgage Life Cover. If your benefit’s decrease rate exceeds the rate of your mortgage loan decrease, you may find yourself lacking in cover.
Level Term Life Insurance
If you have an interest-only mortgage a Level Term Insurance policy is usually the most suitable option. With this type of cover the level of protection remains fixed throughout the life of the plan to reflect the fact that you don’t have to repay the outstanding capital balance of the loan until the mortgage ends.
It’s usually the best option for those looking for a level of family protection over and above the mortgage loan, also, as the amount of cover doesn’t diminish over time.
Cover Options
Joint Life Cover
If you hold a mortgage together with another person and both contribute to the payments, it makes sense to protect both halves of the mortgage. This can be done by purchasing a Joint Mortgage Life policy. Joint cover will pay out your agreed benefit if either partner passes away before your mortgage has been paid off.
Be aware that most Joint Mortgage Insurance policies are Joint Life First Event, which means they’ll pay out when the first partner passes away and will end immediately after. As such, it may not be an ideal Life Insurance option if the people covered would like to leave something to their children in addition to paying off their mortgage because the policy would be over after the first claim.
Premium Types
There is more than one option when it comes to premiums and how your policy is priced, which is something to look out for carefully.
Guaranteed Premiums are fixed at the start of your policy and won’t change unless you adjust your cover.
Reviewable Premiums on the other hand are assessed regularly and adjusted according to what the insurer deems an appropriate price depending on how circumstances have changed in the wider world.
Depending on your personal circumstances, one premium type is likely to be better suited for you.
Guaranteed Premiums usually start out more expensive but are the more reliable option if you intend to have your policy for a long time and could work out cheaper over the life of the loan. Reviewable Premiums are usually cheaper at the start, but they can see unexpected price hikes and don’t typically have predictable increase rates.
Add Critical Illness Cover to Mortgage Life Insurance
With both Level and Decreasing Term Mortgage Life cover it is possible to add Critical Illness Cover, which will cover you if you are diagnosed with a critical illness or injury.
Unlike Income Protection, Critical Illness Cover will only pay out if you are diagnosed with a condition included on a pre-set list of health problems covered by your policy. On its own, it is not normally as effective as Income Protection when it comes to protecting your finances if you are unwell. You can find out more about this in our Income Protection vs Critical Illness guide.
Mortgage Life Insurance with Critical Illness Cover will cover you against death, terminal illness and critical illness. A policy will pay out if you pass away, if you are diagnosed with a terminal illness, or if you are diagnosed with a condition on your insurer’s pre-set list of critical conditions.
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