For many of us, besides starting a business, a mortgage is one of the largest financial commitments we’ll have to make. However, if you die before it has been paid off, your family will be the ones left to pay it off.
Mortgage life insurance is a smart way to ensure your family’s home is protected when you die, but what makes it worth buying?
What is mortgage life insurance?
Mortgage life insurance (also known as decreasing term life insurance) is a type of life insurance policy plan that pays out a lump sum when you die. This money can be used to help your loved ones pay off the outstanding balance of your home’s mortgage.
Why do I need a mortgage life insurance policy?
Life can be unpredictable, meaning we have to plan for the worst as well as the best. Unfortunately, when you die, your mortgage doesn’t disappear. Your provider will expect your partner or spouse to carry on with repayments, if not they may be forced to sell your home.
Therefore, life insurance coverage can provide peace of mind for your loved ones, ensuring your home is secure during any difficult times ahead.
If you don’t have any dependents, then naturally you won’t need life cover for your mortgage. Furthermore, if you already have a life insurance policy, your family should be able to use the pay-out towards mortgage repayments.
Types of mortgage life insurance
Several types of life insurance coverage can be used to cover a mortgage such as:
Level term coverage
A preferred option if you have an interest-only mortgage, term life policies last for a set amount of time (ie. 20 years). Your family only receives a pay-out if you die within this time, otherwise, the policy expires.
One benefit is that throughout this time, the payout value and premiums are fixed. The length of your cover should be an estimate of when you hope to have paid off your mortgage.
Decreasing term coverage
The policy pay-out is in line with your mortgage balance. As you make repayments the payout value decreases over time. This way, if you die, your family will have enough to pay the remainder owed.
Whole life insurance
One of the more costly forms of life cover, whole life insurance covers you for the rest of your life. No matter when you die, your family receives a lump sum that can be used for a number of finances, not just a mortgage.
Like level term insurance, both the policy value and premium costs are fixed throughout the policy. Even as you get older, or develop health conditions you’ll still pay the same for cover.
As with any type of life insurance, once you take out cover, you begin paying monthly premiums to your insurance provider. If for whatever reason you fail to keep up with your payments, your cover will be ended. Should this happen you won’t receive any reimbursement for premiums previously paid.
Other types of mortgage coverage
There are a few other ways to get cover for your mortgage such as critical illness cover. While this doesn’t payout in the event of death, it will if you suffer from a critical illness.
Once you are diagnosed with a critical illness, your insurer pays out a tax-free lump sum. This can cover the income you may have lost from not being able to work and can be used towards mortgage payments.
Not all insurers cover the same illnesses so it’s best to check the terms and conditions of your policy.
Can I get joint life cover for a mortgage?
If you and your partner share an income as well as a mortgage, it’s worth looking at joint life insurance. This type of cover protects two people under a single policy.
Joint policies are popular amongst couples as they can be easier to manage and cheaper than buying two single policies. This way you and your partner have enough money to pay off your mortgage regardless of which of you dies first.
Is it compulsory to take out life insurance with a mortgage?
There is no legal requirement for you to take out life insurance cover alongside a mortgage. Despite this, your mortgage lender may advise on getting cover to ensure their loan is protected. With this in mind, it’s up to you to decide whether or not you buy life cover.
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