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Although most mortgage providers don’t require you to take out life insurance when you take out your mortgage, many people choose to do so. It gives them the peace of mind that their loved ones’ home will be secure if their mortgage hasn’t been paid off at the time of their death.
In this article, our experienced and knowledgeable team of independent financial advisers at PIL Southampton highlights the key points of mortgage life insurance and how it differs from standard life insurance.
Mortgage life insurance is a policy designed specifically to pay off your mortgage if you die during the term of your mortgage.
The monthly premium that you pay will depend on various factors including the amount you owe on your mortgage, your age, health, lifestyle choices and the kind of job that you do – this is all relevant because your insurance provider will be weighing up risk factors relating to your life expectancy.
A life insurance policy, otherwise known as a ‘Level Life Insurance’ policy provides the same amount of cover throughout its term. This means that, for as long as you continue to pay the monthly premium, the policy will pay out when you die. Its aim is to protect your dependents financially in the event of your death, with the funds being used to pay off the mortgage or rent, other household expenses, to support children through higher education, or a combination of all these things. In fact, it’s their choice to spend this money however they wish.
Just as a repayment mortgage decreases over time as you pay it off through the years, the cover provided by a mortgage life insurance policy also decreases over time. It is therefore also sometimes described as a ‘Decreasing Life Insurance’ policy. Its sole purpose is to pay off an outstanding mortgage, in full, if you were to die, and it would pay out as long as you were still paying the policy premiums.
If your beneficiaries would need more financial support than just the mortgage being paid off, then you may decide that a ‘level term’ or a ‘whole of life’ insurance policy could better suit your needs.
As long as you maintain your monthly premium, these types of insurance policy last for your lifetime, and pay out a fixed sum when you die.
When you take out a ‘level term’ policy, you decide on the length of your policy and a particular sum that you would like to be paid out on the event of your death. This is the fixed, or ‘level’, sum that will be paid out, if it is required, during the term of your policy.
A benefit of a ‘whole-of-life’ insurance is that it has no end date, however there is a downside in that it gets more expensive at each review point.
One reason that people choose a whole-of-life insurance policy is to mitigate inheritance tax, as its payout should hopefully cover the inheritance tax bill after you die.
If you live on your own and have no dependents relying on your income to support them financially, or if your loved ones would not be financially impacted when you die, then you might not need mortgage protection.
You may also not need to take out a mortgage protection policy if your employee provides a ‘death-in-service’ benefit that would pay out a multiple of your salary. Of course, this cover would no longer apply if you changed jobs or were made redundant.
Another reason not to take out a specific mortgage life insurance policy would be if you already have a life insurance policy that you are confident would cover your mortgage as well as your dependents’ other financial needs.
However, if you have no cover or if it is insufficient for your family’s needs, then a mortgage life insurance could be a prudent option.
For many people, knowing their mortgage will be paid off if it’s still outstanding when they die is their primary motivation for taking out life insurance. So, specifically taking out mortgage life insurance takes care of this without potentially over-paying through a standard life insurance policy. Instead, you are only paying premiums to cover the exact amount you need.
When you take out mortgage life insurance, you will be given two choices of monthly premium; guaranteed or reviewable. Guaranteed premiums remain fixed throughout the life of the policy. Reviewable premiums are often lower at the outset, but there is the possibility of them increasing in the future so they could potentially end up more costly in the long run.
A joint policy can often be cheaper than two sole policies, but this is because it only pays out once – usually on the death of the first policyholder. A joint policy is therefore suitable if your partner is your only dependent.
Usually, mortgage life insurance is cheaper than a life insurance policy as the amount of cover you are buying decreases over time, whereas a life insurance payout is fixed.
Consider writing your mortgage life insurance policy in trust, so that the insurance pays out directly to your dependents. Otherwise, the payout from your mortgage life insurance will form part of your estate and could have inheritance tax implications.
To reiterate, as the name suggests, a mortgage life insurance policy covers just that. If your loved ones would need wider financial support after you die than just paying the mortgage off, then a life insurance policy instead of, or in addition to, a mortgage life insurance policy could be the right choice for you.
Your mortgage provider is likely to offer you a mortgage life insurance policy but this might not be the most competitive option.
Costs for life insurance policies can vary significantly so it’s always worth shopping around, but it’s not like researching car or home insurance where you can easily look up various options on comparison sites.
You’ll usually find the best deals available for you by going through a broker, like PIL Southampton.
Our qualified, experienced and friendly team of independent financial advisers is here to help you to find the right option for you. They will carefully review your circumstances and your needs so that they can advise you on the most appropriate and competitive mortgage life insurance products available for you in the marketplace.
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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