What is mortgage life insurance?
Mortgage life insurance, as the name suggests, is a policy designed to pay off your mortgage debt with a cash lump sum pay out, if you die during the term.
Sometimes mortgage life insurance is also referred to as ‘decreasing term life insurance’, ‘mortgage protection’ or ‘mortgage protection life insurance’.
Cover usually aligns with your mortgage term, protecting the family home and your dependents, should anything happen to you.
Therefore, if you have a 25-year mortgage term, your life insurance policy would run for at least this length of time.
There are two types of life insurance commonly used to cover a mortgage. The most common, decreasing term, as well as level term.
The Money Charity in the UK reports:
- £121,687 is the estimated average outstanding mortgage per household
- 35% of UK households have no savings whatsoever
- 52 mortgage possession claims and 37 mortgage possession orders are made every day.
These statistics emphasise just how important protecting your home with life insurance cover is.
See data from their February 2018 report, to see how you compare.
Why might you need mortgage protection cover?
A mortgage is likely to be the largest debt that the vast majority of us will incur during our lifetime.
Very few people are lucky enough to have the funds to buy a house outright. Therefore, a mortgage is necessary if we are to own a home.
Often, a property purchase is much more achievable if we take out a joint mortgage, with our spouse, partner or a friend.
But what would this mean for the surviving partner and possibly children, if one of you was no longer around?
- Could you afford the monthly mortgage repayments?
- Could you afford on-going household bills?
- Could you maintain your current standard of living?
- Would you have to downsize your property?
- Would you need to return to work?
Having adequate mortgage life insurance protection in place is vital for homeowners who do not want to burden their partner with unaffordable mortgage repayments in the event of their death.
Mortgage life insurance can also provide you with complete peace of mind, knowing that your family will not be forced into an unwanted change of lifestyle.
Types of mortgage cover
There are 2 main types of life insurance available to cover your mortgage:
- Decreasing term. Very common – normally taken out to cover a repayment mortgage
- Level term. Normally taken out to cover an interest-only mortgage (where the balance does not decrease).
As with any life insurance cover, the policy you choose will be dependent on your budget, age, health, whether you have children and the level of protection you require.
Decreasing term vs level term
A decreasing term life insurance policy is the most common and cost-effective option to protect your mortgage.
Decreasing term life insurance is designed to help protect a repayment mortgage. The amount of cover you receive (the pay out) reduces over time in line with your mortgage balance.
This means your beneficiary would receive enough money to pay off the house, but not much else. If you have children too you may require more coverage.
Because the financial risk to the insurer reduces during the term, this helps keep monthly premiums low, compared with level term cover.
With level term life insurance, your level of cover remains the same throughout the policy.
This means, if you die at any time during the term, your beneficiary will receive a fixed lump sum, regardless of whether that is right at the start or the end of the policy.
Because the insured sum stays the same over the term, your monthly premium payments are likely to be higher, compared to decreasing term cover.
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 full balance.
An advantage of level term cover is that your dependents are likely to receive more funds than are needed to pay off the mortgage.
So, as well as paying off the house, there will be additional funds left to cover other expenses, such as expensive funeral costs or on-going living costs.
This could be a good option if you have children and want to provide for their future needs too i.e. further education.
An example scenario:
Harry and Penny, both aged 26, are first-time buyers with a 25-year repayment mortgage term. They are married and although they do not 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 do not 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 are both young and in good health, their monthly premiums are low. Despite this, they do not 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.
Is mortgage protection insurance compulsory?
Generally, no. Mortgage protection life insurance, although a very good idea, is not usually compulsory.
However, some lenders may request that you have mortgage life cover in place before agreeing to release funds, ensuring their risk is protected.
You also do not have to buy cover directly from your mortgage provider or estate agent. Normally, you can secure a much better deal if you compare multiple quotes or use a broker.
Who receives the pay out?
The pay out is made directly to your named beneficiaries, (often your spouse or partner), and not the mortgage provider.
Although the policy pay out is intended to pay off your mortgage debt, beneficiaries can use it for whatever they wish.
Write your mortgage life insurance in trust
In life insurance terms, a trust is simply a legal arrangement designed to ensure that the pay out from your policy is distributed as you intended.
The policy is looked after by a trustee until the time comes for the benefit to be released to your beneficiaries.
Because the policy has been written in trust to the trustee/s, the proceeds avoid forming part of your legal estate.
The key benefits of writing your policy into trust are:
- Avoid or minimise 40% inheritance tax (over the £325,000 threshold)
- Avoid the lengthy probate process (for a faster pay out)
- Have more control over who gets the funds and when.
Is ‘mortgage life insurance’ the same as ‘mortgage payment protection insurance’ (MPPI)?
No. Do not confuse mortgage life insurance, with mortgage payment protection insurance (MPPI).
MPPI is designed to pay your mortgage for a period of time if you become too ill to work, or are unemployed. Whereas mortgage life insurance takes care of your mortgage debt if you die.
Joint vs 2 single policies
It can be tempting to think that the ‘joint’ approach is the way to go. You may already have a joint mortgage and bank account together, so why not a joint life insurance policy too?
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 easier to set up a joint policy.
However, it is important to remember that a joint policy will only ever pay out once, normally on first death. If you have dependants it may be more beneficial to take out single policies, providing 2 pay outs.
Another consideration is, what if the relationship breaks-up? If you have a joint policy, 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, paying more for your premiums.
Terminal illness cover
Most mortgage life insurance cover now offers terminal illness as standard.
Terminal illness cover protects you if you are diagnosed with a serious illness by a medical professional, and are predicted to die within 12 months. A common terminal illness would be an advanced form of cancer.
Having access to your life insurance proceeds early could help clear your mortgage, pay for house alterations or a home carer.
Critical illness cover
You can also opt to include a critical illness element on your mortgage life insurance too.
Critical illness cover will pay out a lump sum if you suffer a life-changing illness. A critical illness is likely to affect your ability to work, however, is not expected to result in your death within 12 months.
Depending on the policy, this can include conditions like heart attack, stroke, deafness, and MS. All these conditions will have a major impact on your ability to work, earn and look after yourself going forward.
Please note: Not all critical illness cover is the same and different policies will include different conditions/illnesses.
Things to consider with mortgage life insurance:
- A great option if you have dependents and/or a large mortgage
- You can protect your mortgage with decreasing or level term cover
- There is no cash-in value to decreasing or level term policies
- You can include critical illness and terminal illness options
- You can write your policy in trust to maximise the pay out
- Mortgage life insurance and MPPI are not the same things
- If your mortgage changes you should review your cover, (do not be under or overprotected)
- If on decreasing term, ensure the interest rate on your mortgage does not exceed the interest rate on your policy
- If you have taken out cover through a lender, you can switch and possibly make a saving.
Why use Reassured to secure the best mortgage protection?
- We have vast experience securing 1000’s of customer’s comprehensive mortgage cover
- Life insurance is what we do, (it is all we do), day in and day out
- We will search the market on your behalf, finding the most suitable and competitive quotes
- 13,500 cannot be wrong! We have an ‘Excellent‘ average Trustpilot rating – 9.6/10
- We are completely independent, impartial and never charge you a fee
- There is no obligation to take out your personalised quote
- We are 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.