If you own a house, your mortgage is likely to be one of your largest monthly outgoings. This begs the question of how your loved ones would be able to keep up with the repayments in the event of your death.
The aim of a life insurance policy is to help your dependants cope financially if you die, so outstanding debts and living expenses are less of a burden on them.
A common type of policy used for this is term life insurance. This is designed to pay out if the policyholder dies during the term of the policy. When you apply for this type of life insurance you’ll select how long you want the policy term to be, for example 25 years.
People looking to get protection specifically for their outstanding mortgage often opt for a decreasing term life insurance policy, more commonly known as mortgage life insurance.
How does it work?
A decreasing term policy is usually used to cover the outstanding balance of a repayment mortgage. With a repayment mortgage your debt decreases with each repayment you make. As your outstanding debt goes down, you may find that the amount of life cover you need will also decrease.
Decreasing term life insurance aims to cater for this, and so the total amount of cover decreases over time, roughly in line with your mortgage:
*Figures used for illustrative purposes only.
If you're taking out a decreasing term policy to cover your mortgage debt, you should make sure that the term of your policy covers the length of your mortgage - e.g. 25 years.
The amount you’re covered for decreases over the policy term, but the monthly premiums remain the same. If you were to die in the second year of the policy term, your payout would be significantly higher than if you died in the 20th year, as you would owe more to your mortgage lender.
Other factors being equal, a mortgage life insurance policy tends to have lower premiums than other policy types.
How is it different from level term insurance?
There is another common type of term life cover called level term life insurance.
This policy is quite straightforward – it’s designed to pay out a flat sum if you die within the policy term. The payout is the same regardless of when it happens, and so premiums tend to be higher. To find out more, read our guide to level term insurance.
Points to consider with mortgage life cover
There are a few things to bear in mind when taking out this kind of policy. First of all, it may not be appropriate if you have an interest-only home loan, as the amount you owe the lender will not be falling year-on-year.
Many people decide to extend their mortgage term when they move house, or when they want to reduce the size of their monthly repayments.
It's important to ensure that the length of the policy term always matches the term of the mortgage, so if your mortgage term changes for any reason, talk to your insurer about changing your life insurance policy.
Your mortgage lender may attempt to sell you life cover when you get your mortgage. You’re under no obligation to buy from them, so take the time to compare life insurance quotes and find a policy that best suits you.
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