Buying a home is a massive step in life. Though it might be difficult to imagine, what would happen to your house, if you died tomorrow? That’s why it may be time to think about taking out mortgage life insurance, so you can protect your family’s home for years to come.
In this article we’ll be looking at:
- What is mortgage life insurance?
- How does mortgage life insurance work?
- What does mortgage life insurance cover?
- The cost of mortgage life insurance
- Alternatives to mortgage life insurance
What is mortgage life insurance?
When you buying a home, the loan taken out to cover the cost is known as a mortgage. You are required to pay off the mortgage until the full amount has been re-paid, but where does life insurance come into all of this?
Mortgage life insurance is a type of life insurance policy, which covers you for an agreed length of time (i.e. 30 years). When you die, the insurer will issues the policy pay-out to your family – typically a cash lump sum.
How does mortgage life insurance work?
Like term life insurance, mortgage life insurance only pays out if you die within the agreed period. The process of taking out a mortgage life insurance policy is usually fairly simple:
- First, you choose the amount of cover needed – this is the amount outstanding on your mortgage
- You then choose how long you want to be covered for – or how the amount of time you expect to pay off your mortgage.
- Once you have been accepted, you will begin paying monthly or annual premiums to your insurance provider
Mortgage life insurance can work as three different types of coverage:
- Decreasing term
- Increasing term
- Level term term
With Decreasing term, the policy pay-out goes against the amount owed on your mortgage. So as you pay off the mortgage, over time, your pay-out will reduce until reaching zero, in which the policy ends.
This is so that if you die before the mortgage is re-paid, your family can use the pay-out to cover the cost. Your premiums will remain the same but are typically less than other types of cover.
Increasing term works a bit different, the policy pay-out increases over time, to protect it from inflation. That way when your dependents receive the pay-out the value remains the same to match the rise in the cost of living. The downside is that although the pay-out increase so too might your premiums.
With level term cover, the pay-out amount remains the same throughout the length of the policy. Level term cover is usually more expensive than other types Because the pay-out is fixed. This type of cover may work best if you have an interest-only mortgage.
What does mortgage life insurance cover?
Mortgage life insurance can cover more than just a mortgage, it can also be used to pay towards:
- Any other outstanding payments like debts, loans and credit card debts, that your family may be left to pay.
- Daily living costs for your family
- Childcare costs
- Education costs such as university tuition fees
The cost of mortgage life insurance
There are several factors used to determine the cost of mortgage life insurance. When applying for a cover your insurance provider may ask about:
- Your age – as you get older, the cost of life insurance rises
- Your health – If you are in poor health or have any conditions you may pay higher premiums or even be denied coverage
- Your job – Premiums may be higher if you are employed in a high-risk job as you are more likely to make a claim
- If you are a smoker – most insurers raise premiums for people who smoke. However, some insurers may also lower your premiums as an incentive for you to quit.
Alternatives to mortgage life insurance
There are other ways to consider in which you can protect your properties mortgage such as:
- Income protection insurance – this covers you in the event that you are unable to work due to illness or injury. The pay-out is usually worked out as a percentage of your salary and can be used towards mortgage costs
- Family income benefit – this can provide your family with financial aid to help cover the cost of the mortgage when you are no longer there to provide. Whilst life insurance pays out a lump sum, a family income benefit pays out monthly
- Mortgage payment protection insurance – also known as ‘MPPI’. This form of income protection pays for your monthly mortgage payments, if you can’t work due to illness, injury or have been made redundant.
- Critical illness cover – this is an add-on for life insurance policy, critically illness cover pays out if you were to become critically ill. The policy pay-out can be used to support you and your family through this difficult time.
This article was written by David Griffiths. Dave has worked in digital 10 years in client-side, agency-side, and self employed capacities. He now writes engaging content and creates innovative digital strategies for the the finance and tech industries.He is the creator of Enviroute – A new travel app which is currently seeking investment. Dave spends more time than he cares to admit watching skateboarding videos and likes to express himself through the medium of internet memes! You can link with David by clicking here.
