If you’re thinking about buying a home, or already own one, you may be wondering what happens to your mortgage in the event of your death?
Unfortunately, your mortgage won’t just disappear. Instead, your provider will turn to your family to maintain repayments. If they can’t keep up with these payments, they may be forced to sell their home or have it repossessed. So how can we protect our home’s mortgage?
Mortgage life insurance is designed to help your loved ones cover payments towards your home’s mortgage should you die before it has been paid off. In this article, we’ll look at how this type of policy works and your options when buying cover…
What is mortgage life insurance?
Mortgage life insurance is a type of life insurance policy plan intended to help your loved ones pay off the remaining balance on your mortgage when you die. Rather than being a specific type of policy, it can be made up of several cover types; including whole and term life insurance.
These types of cover work differently to each other, yet they both pay out a cash lump sum to your loved ones when you pass. As with any type of life insurance policy, you pay monthly premiums to your insurer for cover. Should you fail to maintain these payments, your cover may be cancelled early. Also, you won’t receive any money back for the premiums already paid.
The main aim of having life cover for your mortgage is so your family can have peace of mind should the worst happen. This way, they can keep up with mortgage repayments without relying on your income.
Which policy type is best for mortgage cover?
There are three main types of cover used to protect a mortgage:
- Whole life insurance
- Decreasing term life insurance
- Level term life insurance
Each of these cover types performs differently, but share one particular trait – they all pay out when you die…
Whole life insurance
Known to insurers as life assurance, this type of cover protects you for the remainder of your life. Once you die, the policy pays a tax-free lump sum to your loved ones, which they can use to clear your home’s mortgage.
Whilst one of the most expensive types of cover, whole life policies pay out regardless of when you die. Therefore, it provides permanent cover, not to mention peace of mind for your loved ones. Both your premiums and policy amount are fixed throughout the policy as well.
This type of policy can be used to cover other expenses – not just mortgage repayments. For example, if your mortgage has already been paid off when you die, your loved ones can use the pay-out to cover finances, such as:
- Living costs
- Funeral expenses
- Household bills
- Clearing other outstanding debts or loans
Level term life insurance
One of the main differences between term life insurance and whole is that term life policies provide cover for a set period of time (i.e 20 years). In other words, the policy has an expiry date. The policy pays out should you die within the policy term, as agreed upon with your insurer.
Should you survive the policy term, the policy expires, and you won’t be able to claim any money for premiums paid. Despite this, term life policies are typically cheaper, and because of their time frame – can be ideal for covering a mortgage.
Level term cover is the standard type of term life insurance. Throughout the policy, both the payout amount and premium rate remain the same.
Decreasing term life insurance
Most notable when it comes to mortgage protection, decreasing term life cover is typically taken out alongside a mortgagee or significant loan. The pay-out value decreases over time as you make repayments on your mortgage. It’s designed so that should you die before the mortgage has been repaid, your family can use what’s left of the pay-out value to clear the remaining balance.
The initial pay-out generally reflects the outstanding balance on your mortgage. You choose the length of the policy term – usually matching your mortgage term. This type of cover can be best suited if you have an interest-only mortgage.
How much is mortgage life insurance?
The cost of a mortgage life insurance policy depends on several factors. When applying for cover, you’ll typically be asked to apply for a quote – this is an estimate as to how month your monthly premiums will be.
Your insurer will ask you some questions such as:
- Your Age
- Your outstanding mortgage balance
- The type of cover you need
- How long you wish to be covered for
All these factors can affect the cost of your policy – age and health being the main two. With life insurance, the older you become, the higher your premiums will be. This is due to the fact that a claim is more likely to be made than if you were younger.
If you and your partner share an income, as well as the responsibility of your home’s mortgage, it may be worth considering joint life insurance cover. This type of policy covers two people under a single policy. Joint policies are typically cheaper and easier to manage than buying separate policies for you and your partner.
Whatever policy you decided on, know that you’re doing the right thing by ensuring your family’s home is protected!