For anyone who is buying or has bought their own home, this question has probably crossed their minds at least once or twice. Mortgage life insurance and straightforward life insurance are two very similar products, but are designed to do two different jobs. Here’s what you need to know.
What Is Life Insurance?
Life insurance is a policy which you take out, usually voluntarily, in order to provide for your family if you unexpectedly pass away. There are many kinds of life insurance, some which last for a fixed period of your life, others which stay with you for the whole of your life. The settlement figure can be anything from a few thousand pounds, designed to cover the cost of your funeral, up to many hundreds of thousands; enough to pay off all your debts and leave a good nest egg for your family too.
What Is Mortgage Life Insurance?
Essentially mortgage life insurance does the same job; it pays out some money if you die unexpectedly. However, this type of policy is designed to only cover the outstanding mortgage debt, and will not pay for any other debts, any funeral costs or leave any cash for your dependants. This is also referred to as ‘decreasing term life insurance’ because the amount it pays out decreases over the years, in line with the reduction in your outstanding mortgage.
Things To Think About
Sometimes your mortgage lender will require that you take out mortgage life insurance when you agree to borrow the money. Other times, you may be looking to take out some form of protection so that your family are taken care of if you are not around.
Whatever your reason for investigating life insurance, there are a few things you’ll need to think about before you decide:
Decreasing term or fixed term? Mortgage life insurance is typically a decreasing term policy, which reduces in line with your mortgage. This is the cheapest type of life insurance policy, but for a slightly larger investment, you could be covered under a fixed term policy. This policy would run for the same term as your mortgage, say 20 or 25 years, but would pay out the same amount all through the term. This means that as you pay off more of the mortgage yourself, you could be leaving a nice little nest egg for your loved ones.
Lenders policy or a third party? Your lender may try to sell you their own mortgage life insurance, but are they offering you a good deal? You are not obliged to take their deal, and it’s a good idea to shop around to see what other companies can offer.
Single or joint? A common problem with mortgage life insurance is that they can end up being joint. Usually, a joint life insurance policy is not worth having, and most good brokers will recommend you take out separate policies instead. Even if you have a joint mortgage, you aren’t required to have a joint insurance policy, so look to take out two separate agreements instead.
Changing interest rates: When you set up your mortgage, your lender will help you arrange a decreasing term policy which will reduce in line with your mortgage balance. However, changes in the Bank of England base rate could dramatically change the outstanding balance on your mortgage over the term of the agreement. For this reason, it’s important to reassess your mortgage life insurance from time to time to make sure it’s still enough to cover what you owe on your house.
Mortgage life insurance is a great solution for those on a tight budget who don’t have any dependants to think about. It’s cheap, it covers what you need it to, and it will make your lender happy.
However, if you have children or other dependants, or if you want to pay off other debts in the event of your unexpected death, you should consider other types of life insurance too.
If your mortgage life or life insurance policies are up for renewal soon, and you would like some help investigating a better deal for you and your family, please do not hesitate to contact me. Call 01252 759233 or email info@thesurreymortgagebroker.co.uk
