What is mortgage protection insurance?
Mortgage protection life insurance, as the name suggests, is a type of life insurance policy specifically designed to pay off your mortgage with a lump sum pay out, if you die before the balance is cleared.
Sometimes mortgage life insurance is also referred to as ‘decreasing term life insurance’, or ‘mortgage protection insurance’.
Cover usually runs alongside your mortgage, providing protection, should something happen to you; so if you have a 25-year mortgage term, your policy will run for at least this length of time.
There are 2 main types of mortgage protection cover commonly used in the UK, decreasing term and level term, (more information below).
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Is mortgage protection insurance compulsory and who gets the money?
Mortgage life insurance, although often a very good idea, is not compulsory. You also don’t have to buy cover directly from your mortgage provider or estate agent. Often you can secure a much better deal if you shop around for quotes.
A pay out is made directly to your named beneficiaries and not the mortgage provider. Although the sum is designed to pay off your mortgage balance, beneficiaries can use it for whatever they wish.
Don’t confuse mortgage life insurance, with mortgage payment protection insurance (MPPI).
MPPI is put in place to pay your mortgage for a period of time if you are too ill to work, or have become unemployed. Whereas mortgage life insurance is in place to take care of your mortgage debt if you die.
Why might you need mortgage protection cover?
A mortgage is likely to be the largest amount of debt that the vast majority of us are going to incur during our lifetime.
Very few people are lucky enough to have the capital to buy a house outright. For most of us, a mortgage is necessary, if we are to own our own home.
For many, a house purchase is also much more achievable if we take out a joint mortgage, often as a couple. But what would this mean for the surviving partner and possibly children, if one of the joint owners dies?
- Could you keep up with the mortgage repayments?
- Could you maintain your current standard of living?
- Would you have to downsize your property?
Having mortgage life insurance cover in place is invaluable for homeowners who don’t want to burden their partner with unaffordable mortgage repayments in the event of their death.
It can also provide you with peace of mind, knowing that your family or dependants won’t be forced into an unwanted change of lifestyle.
On occasions some lenders may request that you have mortgage life cover in place before they agree to release funds, ensuring their risk is protected.
Having the security blanket of mortgage life insurance in place can:
- Protect your family home for your loved ones
- Prevent repossession of your property
- Help maintain your family’s standard of living
- Help ensure you do not have to downsize, to release funds
- Minimise the risk of unsettling your children, (change schools, move to a new area etc)
- Provide the reassurance that you can make mortgage repayments and pay household bills.
Types of mortgage life cover
There are 3 different types of mortgage life insurance cover available:
- A ‘decreasing term’ policy – normally taken when you have a repayment mortgage
- A ‘level term’ policy – normally taken in line with an interest-only mortgage, as the balance on your mortgage will remain the same for the term
- ‘Whole of life’ cover – which is far less common, but guarantees to pay out.
As with any life insurance cover, the policy you chose will be dependent on your available budget, age, health, personal circumstances and the level of protection you want for your family.
Decreasing term vs level term
Decreasing term life insurance is the most cost-effective form of protection for mortgages, as the risk to the insurer reduces over time, as the level of cover decreases. This ensures your monthly premiums are generally far lower, compared to level term life cover.
A decreasing term policy decreases, normally in line with your mortgage balance. This means your dependents are left with enough money to pay off the mortgage, but not much else.
If you have a repayment mortgage, your debt will decrease over time, thus a decreasing term policy may be better suited to your needs.
Level term life insurance stays the same no matter how old you are, or what happens to your mortgage. This means that if you die within the policy term, your dependents will get a set amount, regardless of whether it’s right at the start, or right at the end of the term.
Because the insured sum stays the same over the term, your monthly premium payments are likely to be higher, in comparison to decreasing mortgage life insurance.
One advantage of level term cover is that your dependents may receive more funds that are needed to pay off the remainder of the mortgage, (depending on when you pass away and the type of mortgage you have).
So as well as paying off the mortgage, there could be additional funds left to cover other expenses, such as expensive funeral costs or ongoing living costs.
If you have an interest-only mortgage, level term cover would generally be considered better suited to your needs, in order to pay off the balance.
An example scenario:
Harry and Penny, both aged 26, are first-time buyers with a 25-year repayment mortgage term. They’re married and although they don’t have children yet, plan to start a family in the future.
In order to meet their mortgage commitments, they rely on the income from both their salaries. Because of this dependency on each other, they feel vulnerable and exposed.
If the worst were to happen, they don’t want to burden the living partner with an unaffordable debt. As a result, they decide to protect themselves, and their property, by taking out life cover.
Because they’re both young and in good health, their monthly premiums are low. Despite this, they don’t have much disposable income, as all of their savings have been invested in their property, so they opt for the more affordable joint decreasing term cover.
How would this work?
If either Harry or Penny dies during the 25-year policy term, the outstanding balance of their mortgage would be covered. This ensures they protect their most valuable asset, their home.
The couple also agrees, in the event of them having children, that they will revisit their policy and, budget permitting, increase their cover to level term – to protect not just their property, but their dependents too.
As your circumstances change, so can your life cover.
Whole of life
A less common and often much more expensive alternative to traditional term insurance is to protect your mortgage with a whole of life policy.
Whole of life cover guarantees to pay out a fixed sum to your beneficiaries when you die, as opposed to just within the set term.
Because there is no term, the monthly premiums tend to be higher compared with fixed-term policies.
Joint vs single mortgage cover
It can be tempting to think that the ‘joint’ approach is always the way to go. You may already have a joint mortgage, possibly a joint bank account too, so why not get joint mortgage life insurance?
There may be a small saving to be made by taking out a joint policy, rather than 2 singles policies. Also, if you are married and have no dependents, it is often much easier to set up a joint policy.
However, it is important to remember that a joint policy will only ever pay out once, normally upon the first death. If you have dependants it may be more beneficial for you to take out 2 single policies, providing 2 separate pay outs.
An unfortunate fact of life is that sometimes relationships break-up. If you have joint cover in place, this is likely to mean you will have to cancel the policy. You would then need to take out a new policy when you are older and likely to have to pay more for your premiums.
Any mortgage protection policy can have terminal illness included. This will provide protection if you are diagnosed by a medical professional, and predicted to die within 12 months. A common terminal illness would be an advanced form of cancer.
Having access to the insurance money early can help cover things like loss of earnings, going on a family holiday together, or even to pay for a carer to help at home.
You can also opt to include critical illness on your mortgage life insurance, which will pay you and your family a lump sum if you suffer a life-changing illness.
Depending on the policy, this can include conditions like cancer, strokes, deafness, and MS. All these conditions will have a major impact on your ability to work, earn and look after yourself going forward.
Things to consider with mortgage protection life insurance:
- You can protect your mortgage with decreasing term, level term or whole of life cover
- There is no cash-in value to decreasing and level term policies
- You can include critical illness and terminal illness options
- Could be a good option if you have dependents and/or a large mortgage
- If your mortgage amount changes you should review your cover, (don’t be under or overprotected)
- If on decreasing term, ensure that the interest rate on your mortgage does not exceed the interest rate on your policy
- If you have taken out cover through your lender, remember you can switch your policy and possibly make a saving
- Don’t double up – you may not need specific mortgage cover if you already have a policy in place which provides sufficient protection.
Why use Reassured to secure the best mortgage protection cover?
- We have vast experience securing 1000’s of customers comprehensive mortgage life cover
- Life insurance is what we do, (it’s all we do), day in and day out
- We’ll search the market on your behalf, finding the most suitable and competitive quotes
- 11,500 can’t be wrong! We have an ‘Excellent’ average Trustpilot rating – 9.6/10
- We’re completely independent, impartial and never charge you a fee
- There’s no obligation
- We’re a non-advised brokerage – we simply listen to your unique circumstances and find the most suitable quotes.
Talk to our Reassured consultants on 0808 168 2025 to discuss your requirements. Let us help you secure the most affordable mortgage protection today. Alternatively Start Your Quote online – it only takes 2 minutes.