A mortgage is undoubtedly the largest amount of debt that the majority of us get into during the course of our lives. Not many people are lucky enough to have the ready cash to buy a house, so for most of us a mortgage is a necessary evil if we are to become homeowners. As a couple, more money is available for a house purchase if we are to take out a joint mortgage on a property, but what does this mean for the surviving partner if one of the joint owners dies?
Mortgage life assurance, also known as mortgage protection, is an insurance policy that is designed to pay off your mortgage if you die before it is cleared. Having a policy like this in place is crucial for any homeowner who doesn’t want to lump their partner with unaffordable mortgage payments in the event of their death. It can provide peace of mind for you, and a welcome cushion for your dependents if you were to pass away.
Don’t confuse mortgage protection insurance with mortgage payment protection insurance (MPPI) agreements, which are completely different. MPPI is put in place to pay your mortgage for a while if you are too ill to work or become unemployed. Mortgage protection is in place to take care of your mortgage if you die.
Just like any other form of life insurance, your mortgage protection insurance is designed to pay out in the event of your death. Mortgage protection insurance will usually run alongside your mortgage, so if you have a 25 year mortgage, your insurance agreement will run for at least this length of time. It is designed to pay off your mortgage if you pass away, but as it is paid directly to your beneficiaries rather than to the bank, it is up to them whether they use all, part or none of it to pay the mortgage off.
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 specified term of the policy, your dependents will get the same amount paid to them whether it’s right at the start or right at the end of the term.
Decreasing term is a cheaper way to get cover for your mortgage if you are not worried about covering for other expenses. A decreasing term policy is mapped out to track the amount you owe on your home, and pays out less and less as time goes on, as you owe less on your mortgage. This means your dependents are left with enough money to pay off the mortgage, but not much else.
As you might have guessed, this type of insurance is actually an ‘assurance’, meaning it will always pay out at some point. The policy can run for as long as you live, and will always pay your family in the event of your death, no matter how old you grow to be. The amount paid out is fixed, so can be used for other expenses if your mortgage has already been paid off.
It can be tempting to think that joint is the way to go for everything. After all, you already have a joint mortgage, probably a joint bank account too, so why not get joint mortgage protection insurance too?
Although there may be a very small saving to be made on a joint policy rather than two singles policies, that really is where the benefit ends. Having a joint policy means that it will only ever pay out once, so if one of you passes away then the other is left to find their own life insurance policy independently. Because they are likely to be older and in worse health by then, they could end up paying substantially more for their cover, or even be refused altogether.
Any mortgage protection policy can have terminal illness included as an option. This will cover you if you are diagnosed with one of the stated illnesses and are predicted to die within 12 months. Having access to the insurance money early can help with things like covering loss of earnings, going on a big family holiday together or even to pay for a carer to help you at home.
You can also opt to include critical illness in your mortgage protection insurance, which will pay you and your family a lump sum if you suffer a life changing critical illness. Depending on the policy, this can include things like cancer, strokes, deafness and MS, which will all have an impact on your ability to work and look after yourself in the future.
Whatever your circumstances are, our consultants will be able to provide you with a number of options to suit your needs for you to choose from.