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Mortgage life insurance

If you want to leave your loved ones financial protection for your home, even if you’re not there to help pay the mortgage, you may want to consider mortgage life insurance cover.

Posted: 1/6/2022 | By Gulay Yildirim

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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.

Here we explain the different types of insurance available to cover the outstanding debt you might have on your mortgage: decreasing term coverlevel term cover and increasing term cover:

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.

If you believe you need life insurance, then consider a life cover policy from the Post Office.

You choose to pay a fixed monthly amount

Depending on which life insurance policy you choose, you will be offered either guaranteed or reviewable premiums.

With reviewable premiums, the insurer has the right to assess and adjust the premiums periodically according to a number of risk and economic factors including things like interest rates or advances in medical treatment. Insurance which has reviewable premiums may have an initial low cost, but you could end up paying significantly more in the long run. However if you intend to take out a long-term policy with a high value payout, then a reviewable premium offers you a way to mitigate the value of the payout against the rising cost of living. Your age and specific health concerns are only considered when you take out your policy, so although your payout and premiums may be higher than other policies, they would be lower than if you needed to take out more cover at a later stage when your age will have advanced and health concerns increased.

With guaranteed premiums, the amount you pay for your cover now will be fixed until the term of the policy ends. If you are on a strict budget then choosing a policy with guaranteed premiums could help you stay in control of your monthly outgoings.

The healthier you are, the less you pay

Your lifestyle, age and health will all have a bearing on how much your monthly premiums will be. Making lifestyle choices, such as quitting smoking or taking more exercise, may have a positive effect on your mortgage life cover premiums.

There are many critical illnesses that a person can develop that have nothing to do with lifestyle. If you add critical illness cover to your life insurance policy, it could ease the financial burden should you become critically ill, allowing you to focus on getting better. Critical illness cover can cover things like cancer, a heart attack or a stroke.

Joint or single insurance?

If you’re paying for the mortgage with your partner, some insurers offer the option to take out joint or single mortgage life insurance. A joint policy pays out once upon the death of the first policyholder.

A couple may find a joint policy is cheaper than having a single policy each. However, it is important to consider what may happen if you and your partner were to separate and have a joint policy. If you decide upon separating to get a single policy instead, remember that you will be older at that time and can expect premiums to have increased.

Taking out two single policies at the outset means you are both covered in the event of a break-up, and unlike a joint policy (which only pays out once), two single policies will pay out once per policy holder.

Inheritance tax

If you die during the term of your mortgage life cover policy, the payout can form part of your estate, making it potentially subject to inheritance tax. A way to deal with this is to consider writing the policy into trust, which in certain circumstances means the insurance will pay directly to your named beneficiaries. In other words, it never becomes a part of your estate.

If you’re unsure, talk to a professional

  • If you wish to place your insurance policy in trust, try to choose a policy that gives you the option to do so without an extra charge
  • It’s important to take professional advice before doing so. It is very difficult to change or cancel a trust once it’s been created, so you need to be aware of all of the implications before making a commitment
  • Visit a site that offers unbiased help for contacting professionals such as independent financial advisors (IFAs), solicitors and more
  • Some Citizens Advice Bureaus also have volunteer IFAs as part of the Moneyplan scheme - check if your local bureau is taking part

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