First of all, let’s define life Insurance.
Life Insurance is sold for a fixed term. Very much like insuring any other risk, such as your home or car. Should you die during the term of the policy, then you will be entitled to a payment which you may direct toward a specific person or use.
When taking a mortgage most borrowers will take life insurance to cover the repayment of the loan in the event that they die and leave the loan unpaid. This is technically known as Decreasing Term Life Insurance but is often referred to as Mortgage Life or Mortgage Term Assurance.
In any event, most prudent borrowers who have dependents will probably want to make sure that their loved ones are not left homeless in the event that they die and leave the mortgage payments go unpaid.
Many consider life insurance to be a mere ‘bolt-on’ to the mortgage itself but where the life insurance sum is large the selection of the right policy is worth taking some time to consider.
There are different ways to cover financial consequences of your death. These are as follows:
Decreasing term assurance for mortgage cover is a type of policy where the payout sum reduces in line with your total mortgage debt. The premiums for this sort of insurance therefore tend to be lower. It works like this..
The term of your policy will match that of your mortgage and at any time during the term of your mortgage the sum outstanding will be paid on your death. At the beginning of the mortgage this might be a lot of money but in the last few years the sum insured might be just a few thousand pounds.
Most policies come with a Mortgage Interest Rate Guarantee and, which means that your policy should pay off your outstanding mortgage balance. This kind of policy is suitable for people with repayment mortgages, where capital and interest is repaid over the term of the loan. It is not suitable for those who have interest-only mortgages.
With level term assurance, the sum assured stays fixed throughout the duration of your mortgage.
This means that if you were to die near the end of your mortgage term when most of your repayments had been made, you might end up leaving your dependents a home where the mortgage is paid off and an additional surplus fund.
For example, if you had taken out a policy for £150,000 at the beginning of the mortgage term, that's the amount the provider will pay out regardless of when you die; one year or 20 years in, the amount is the same. Because the sum doesn't decrease over time, monthly premiums are slightly higher than for decreasing mortgage life insurance.
A third option is something known as a whole of life assurance, which pays out whenever you die. Instead of a fixed term policy - which might last for 25 or 30 years (the period of a mortgage), cover is continually provided until death - which is of course a certainty at some point.
Whole of Life Assurance could potentially span several decades and so monthly premiums tend to be higher than with fixed term policies.Premiums are also linked to investments, so if investment growth is lower than expected, your premiums can increase substantially over time.
Sometimes providers allow those who reach an old age (perhaps 85 years) to stop payment and still be entitled to a payout when they die.
In addition to lump sum cover payable on death, you might want to consider insuring against the risk of critical illness, unemployment or disability. These policies may also pay out a lump sum or a periodic payment aimed at covering all or part of the period during which you are unable to work..
For more details on what type of insurance would best suit you, contact our protection team on 01628 507477 for an initial chat.
Related articles:
According to a report in the Guardian, senior ministers have asked Treasury officials to look into a “proportional” property tax to see how it would work as an alternative to the existing stamp duty land tax on owner-occupied homes.
More than a quarter of UK adults in long-term relationships (26%) have reported that despite living together, they keep their finances separate from one another.
There has been a rise in both rent and mortgage costs over the last three years, with renters seeing a greater increase in their monthly payments than those with a mortgaged property.
14 days ago
The new Delayed Start Mortgage launched by Skipton Building Society allows first time buyers to postpone the first three mortgage payments. This product has been designed to help soften the blow of moving in costs for first time buyers.
16 days ago
Mortgage lenders are starting to recognise their “Green” responsibilities when it comes to the different products they offer.
A recent study by Boon Brokers where 1,000 people who had used an estate agent over the last year were surveyed, showed that a whopping 52% said they were pressured into using the estate agents’ in-house mortgage broker.
26 days ago
Analysts are predicting further rate cuts this year, with the next one possibly coming down to 4% when the Bank of England’s Monetary Policy Committee meet on Thursday 7th August 2025.
The Financial Conduct Authority (FCA) has shared new changes to mortgage rules with the aim to simplify remortgaging, and encourage competition within the mortgage market.