Buying a home is a big step in life, we all want a place we can call our home. Whether you’re in the process of buying a house or already have a few years left on your mortgage, it’s worth considering mortgage life insurance.
The sad reality is that we will all die one day, but what if you were to die before your mortgage is paid? The last thing we want is for our loved ones to struggle to pay the remainder, or worst of all, be forced to sell the property.
Mortgage life insurance is a great way to provide your loved ones with financial protection for your home, should you die before the mortgage is paid off. But what is mortgage life insurance and how does it work?
What is mortgage life insurance?
Mortgage life insurance (sometimes known as decreasing term life cover) is a type of life insurance designed to protect your home’s mortgage. It provides your family with financial support to pay off the remaining balance on your home’s mortgage if you die before it is repaid.
When you die, your insurer will issue a lump sum payment to your loved ones, which they can then use to pay off the mortgage. Like nearly all types of insurance, you pay monthly premiums through the policy.
How does mortgage life insurance work?
Mortgage life insurance can work as three types of cover – decreasing term, increasing term and level term cover. Term insurance pays out if you die during the agreed policy term (for example, 25 years or so). If you die after the policy terms end, your family will not receive a payout or refund on the premiums paid.
- Decreasing term is the most popular type of cover, typically taken out alongside mortgages, debts and loans. As you pay towards an outstanding payment, the value of the policy payout reduces. The end goal is that once the debt has been repaid, the value of the policy will be zero. Your monthly premiums remain the same throughout the policy.
- Level term is typically a better option if you have an interest-only mortgage. This is because the payout amount is fixed throughout the policy term. This means when you die, your family receives a lump sum, regardless if the mortgage has already been paid off. The downside is that the payout is not protected by the effects of inflation, so it could be worth less than to start with.
- Increasing term is usually the more expensive option, as the pay-out amount increases over time. It works similarly to level term, except that the value increases to be protected from inflation. The downside is that though the value of your policy increases, so do your premium costs.
When taking out a policy, you and the insurer agree on the amount of cover and the policy length. Once that has been finalised, you then start paying monthly premiums to your provider.
The cost of mortgage life insurance
How much you might expect to pay for life insurance can depend on:
- The type of cover you want
- The amount you owed on your mortgage
- The amount of coverage you want
Before you take out a policy, your insurer will ask you about your health and lifestyle. Several factors can determine the cost of your premiums, such as:
- Age
- Health and medical history
- Smoking status
- Occupation
These can determine how likely a claim is made on your policy. For example, if you are in your 40s, a smoker, and employed in a high-risk job, you would expect to pay more towards your premiums.
Despite this, if most of your mortgage has been paid off, you might find premiums are cheaper despite these factors.
Cutting costs for mortgage life insurance
If you’re looking for cheap mortgage life cover, then it’s best to opt for a decreasing term policy, as this is normally cheaper than other forms. Though it’s not a legal requirement to take out mortgage life insurance, some mortgage lenders may advise it.
Don’t rush into anything, such as opting into a policy with your mortgage provider. These policies can be more expensive, so it’s best to take your time and look at all the options available to you.
It may work out cheaper to take out a joint-life policy. This covers both you and your partner in a single policy, instead of you both taking out individual policies. Joint life insurance works either on a first or second-death basis.
With first death, the policy pays out after the first death in the partnership, and then ends. Second death only pays out once both policyholders have died.
Mortgage life insurance or mortgage payment protection insurance?
Though they sound similar, both types of cover work in different ways. Mortgage payment protection insurance (MPPI) only covers your repayments if you cannot work due to injury, sickness or redundancy. In most cases, the payout is calculated as a percentage of your annual salary.
Whereas, mortgage life insurance pays out on your death, but doesn’t necessarily need to be used to pay off the mortgage. If most of the mortgage has been paid off, your family can use the payout towards other outstanding payments, such as, debts, and loans. Your family can also use the payout to help with living and childcare costs.
Get help
Sometimes it’s best to get a second opinion. If you are unsure whether mortgage life insurance is right for you, it’s best to speak with an advisory broker or financial advisor.
They can offer expert advice, helping you find the best policy to match your circumstances and budget. They can also recommend a policy type that is best suited for you and your family.
There are also discount brokers – for a flat out fee, finding the best insurance prices available. However, they also work on commission and do not give advice on which policy is best.
In this case, it may be better to speak to an advisory broker or financial advisor, as they can recommend a policy type that is best suited for you and your family.
