What is mortgage life insurance?
Mortgage life insurance, also known as decreasing term life insurance, pays a lump sum on your death to help pay your repayment mortgage. If your repayment mortgage hasn’t been paid off when you die, then the money from a decreasing life insurance policy can help your loved ones meet your outstanding financial obligations.
Most mortgage life insurance providers have a cap on the interest rate you are charged. For example, if your life insurance cover for a repayment mortgage is capped at 7% but your mortgage’s interest rate is 8%, your payout might not cover the full amount of your outstanding debt if you should die within the term of your policy.
Decreasing life insurance
Decreasing life insurance is designed to help towards paying off reducing debts such as a repayment mortgage, should you pass away before you have finished paying it off. As the amount you have to pay diminishes over time, the insurance payout also reduces. Your monthly contributions remain the same, however, you may be paying less on monthly premiums than with other types of cover.
Level life insurance
If you have an interest-only mortgage, then level life insurance might be your preferred option, as the amount it pays out is fixed throughout the term of the policy. For this reason, it usually costs more than decreasing life insurance. Another consideration is that it is not index-linked and therefore your payout will not increase with inflation.
Increasing life insurance
With this type of product, the amount the policy pays out increases during the term (usually annually). This is designed to counteract the effects of inflation. Providers may do this in two ways - this can be index-linked or rise by a fixed amount periodically (or at specified times). This rise may affect the cost of your premiums, but the policy holder will be given the option to accept or decline this increase. Premiums are typically higher for this type of life cover, but the final payout can help your beneficiaries in many ways.
The right life insurance for you will depend on what you need cover for, how much you need and over what period.