There are three types of mortgage life insurance policies namely, level term, decreasing term and whole-of-life mortgage life insurance.
Mortgage life insurance: decreasing term
A decreasing term insurance reduces the sum assured/pay-out to be in line with the mortgage. So as your mortgage obligation reduces so will the sum assured but the premiums remain fixed. Remember, this type of insurance is only suitable for people who aren’t on an interest only mortgage as no further capital will be required at the end of the mortgage term.
Mortgage life insurance: Level term
In a level term mortgage life insurance, the sum assured remains the same over the whole period of the policy. This means that it doesn’t change in line with your mortgage and therefore gives you the option of leaving your loved ones with a little bit extra for other expenses such as school fees and other living costs. As per the decreasing term, the premium remains fixed however the level term mortgage life insurance is more expensive.
Whole of life insurance is guaranteed to pay-out as there is no term end date meaning it is also the most expensive type of insurance. To add, the premium in a whole-of-line insurance is linked to an investment fund so if the investment fails to perform then the sum assured will either reduce or the premium will increase.
Mortgage life insurance add-ons
Upon selecting one of the above mortgage life insurance policies, you can consider other add-ons such as critical illness cover. But with critical illness cover there is only one pay-out, so if the claimant is diagnosed with a critical condition than no further pay-out will be made once he/she passes away.
With regards to the type of illness covered, the list can be very long especially as some insurer’s cover more than 60 different injuries. However, it is important to note, that in many cases the illness needs to be critical or permanent before the pay-out will be triggered. For the case of cancer, treatable cancers will not be on the list or it will need to be at a certain stage before the pay-out will be considered.
Another common add-on is the ‘waiver of premium’, which allows you to continue having cover without paying any premiums in the event that you are not able to work due to injury or illness.
The quote offered by insurance companies is based on the level of risk that they will have to make a pay-out. So the healthier you are, the more likely that you have a long life expectancy and hence the premium will be lower- The quotation process will take into account factors such as health, age, occupation, weight and life style choices. Moreover, you should compare between different suppliers to see which insurer is truly giving you the best deal.
Mortgage Protection Frequently asked questions
Mortgage protection is a slightly confusing term as it can refer to life insurance or even Payment Protection Insurance. In basic terms, life insurance products cover the policy holder in the event they pass away whilst Payment Protection Insurance covers the monthly mortgage payments in the event that the policy holder is unable to earn/work due Accident, Sickness or Unemployment for up to 12 months.
Mortgage Protection Life Insurance cover pays-out a lump sum amount of money in the event the policy holder passes away. The money is then used by loved ones to pay off the outstanding mortgage.
Mortgage protection cover is also often known as Mortgage Insurance, Term Assurance, Term Life Insurance and Mortgage Life Insurance.
If the pay-out from the insurance policy is to be only used for repaying the outstanding mortgage, then a decreasing term life insurance product is sufficient as the sum insured decreases in line with the reduction in mortgage.
For interest only mortgages, a level term life insurance policy is ideal as the sum insured remains the same as agreed at the start of the policy.
The amount of cover/ sum insured required will depend on individual circumstances. You will need to work out the financial impact on your loved ones in the event you pass away. Essentially, how much financial assistance will they require if your income was no longer available to them?
Typically Terminal Illness Cover is offered as a standard on your Mortgage Protection Life Insurance policy. So, in the event the policy holder is diagnosed with a terminal illness the insurance policy will pay out the sum insured. Though, this doesn’t apply during the last 18 months of the mortgage protection insurance policy.
Other add-ons include Critical illness cover, which pays out the sum-insured if the policy holder is diagnosed with a pre-defined medical condition. With regards to the type of illness covered, the list can be very long especially as some insurer’s cover more than 60 different injuries. However, it is important to note, that in many cases the illness needs to be critical or permanent before the pay-out will be triggered. For the case of cancer, treatable cancers will not be on the list or it will need to be at a certain stage before the pay-out will be considered.
In the event the policy holder is unable to work due to accident, sickness or unemployment, then the Mortgage Payment Protection Insurance pays out monthly payments which will be used to pay for the mortgage for up to 12 months.
Payments from the policy would start one month after the policy holder has been unable to work and in most cases be paid directly to the mortgage provider.
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*Life Insurance: £5 per month, based on 30 year old non smoking male taking a £85000 level term cover for 20 years. Price correct as of 19/11/2019