The importance of life insurance if you have a mortgage

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Recent statistics suggest that over 64% of people now live in their own home with 29% of those people, still paying for a mortgage. (Source: http://uk.businessinsider.com)

If you own a house, itís likely that your mortgage is your biggest monthly expense. Yet, have you ever thought about what would happen if you were no longer around?

How would your partner keep up with the monthly repayments?

Would your family have to uproot children from schools, friends and the local area in order to downsize in order to release equity?

“£121,687 is the estimated average outstanding mortgage per household”. (Source: https://themoneycharity.org.uk)

A mortgage life insurance policy is there to help your family cope if you were to pass away, meaning your mortgage debt could be cleared in full.

Itís also known as ëdecreasing term life insuranceí, ëmortgage protectioní or ëmortgage protection life insuranceí and it would pay out if you (the policyholder) were to die during the policy term.

How does it work?

Mortgage life insurance typically aligns with your mortgage term, protecting your dependants and the family home, if anything were to happen to you.

If you have a 25-year mortgage term, your life insurance policy would also run for this length of time.

There are two types of life insurance policies commonly used to cover a mortgage – decreasing term and level term.

Why do I need mortgage life insurance?

“52 mortgage possession claims and 37 mortgage possession orders are made every day.” (Source: https://themoneycharity.org.uk)

This staggering statistic highlights just how important protecting your home with life insurance is.

“Over half of the owners of residential UK property with a mortgage could be at risk because they donít have protection insurance to cover their monthly mortgage repayments if they were unable to work.” (Source: www.privatefinance.co.uk)

It can also provide you with peace of mind, knowing that your loved ones would be able to maintain their standard of living, in the event of your death.

Decreasing term vs Level term

The most common life insurance used to cover a mortgage is a decreasing term policy, which is also the most cost-effective. Designed to protect a repayment mortgage, the pay out decreases over time in line with your mortgage balance.

This means that the pay out offers enough to pay off the house but usually not much else. If you have children, you may want to think about additional cover. However, compared to level term cover, the monthly premiums are low.

Level term insurance is usually taken out to cover an interest-only mortgage as your level of cover remains the same throughout the policy.

This means that if you die during the term, at any time, your beneficiaries would receive a fixed cash lump sum. As a result, the monthly premiums are approximately 20% higher compared to decreasing term but your dependants are likely to receive more funds to assist them with mortgage repayments, as well as additional expenses such as funerals and living costs.

Level term insurance is also a good idea if you have children and want to provision for their further education and all the associated costs.

However, it’s worth noting that similar to any other insurance cover, your age, health, budget, what you want/need to cover will determine which policy is right for you.

Is mortgage life insurance compulsory?

While mortgage protection life insurance is generally not compulsory, we believe itís a very good idea. However, some mortgage lenders may request that you have life insurance in place before releasing funds.

Whatís more, mortgage lenders usually attempt to sell you life cover when you purchase a property, but you are under no obligation to buy from them.

Take your time, compare multiple quotes and find a policy that best suits your needs. You will most probably save a chunk of money by doing this.

Key reasons for taking out mortgage life insurance:

— Your mortgage would be taken care of if the worst were to happen

— Your family would be able to stay in the family home

— Children would not have to suffer the disruption of being uprooted

— Your stay-at-home partner would not be under immediate pressure to return to work

— It takes away some of the stress at an already difficult time.

Next steps

If youíre considering taking out mortgage life insurance, we recommend that you seize the day and do it. You never know when you may need the cover protection.

The most effective way to secure the best policy, at the right price is to compare multiple quotes. You can do this yourself online or alternatively use a life insurance broker like Reassured to do it on your behalf.

Weíre an award-winning life insurance brokerage, who will search the market finding you the best possible policy quotes to choose from.

And the best bit? Our impartible, non-obligation service is absolutely free to use.

This is a guest article by FCA registered broker; Reassured