Mortgage Life Insurance Explained – Forbes Advisor UK

Mortgage life insurance, also known as decreasing duration insurance, is a way to provide financial protection to your loved ones in the event of your death.

The policy will pay a lump sum to your dependents to cover the mortgage you leave behind should the worst happen during the term of the policy.

Reading: How does mortgage life insurance work

Why is mortgage life insurance useful?

If you’re buying your home with a mortgage and have loved ones who depend on your income, you’ll want to consider mortgage life insurance. if you die without it, your dependents may have difficulty paying the mortgage, which could mean they have to move from the property, perhaps to alternative accommodation.

but if the mortgage can be paid off with proceeds from a life insurance policy, this disruption can be avoided at an already difficult time.

If you’re married or in a relationship, it may be worth getting mortgage life insurance for each of you, even if one of you doesn’t earn an income. this would ease the financial strains that would inevitably follow the death of either of you.

For example, if the stay-at-home partner were to die, paying off the mortgage with the life insurance payment would free up earnings to pay for items like child care.

The cheapest way to get coverage for two people is with a joint policy, but keep in mind that these policies usually only pay once, so the surviving spouse would not have insurance if a claim were filed.

For this reason, and if funds allow, it may make sense to take out separate policies for each person.

how does it work?

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This type of insurance is called “decreasing term” because your “sum insured”, the amount you would receive if a claim were filed, is reduced year after year in line with what is outstanding on your mortgage.

Note that this situation applies to mortgages with “principal and interest” amortization, where you pay the interest and part of what you owe each month.

If you have an interest-only mortgage, the amount you owe doesn’t decrease over time and is paid all at once at the end of the loan term, so it might not be worth reducing the life insurance on the mortgage. instead, you would need level term insurance, where the potential payout is fixed.

Today, interest-only mortgages are rare. if you have a mortgage, it’s probably the payment variety.

It’s also worth remembering that mortgage life insurance won’t provide money beyond the amount owed to your lender, so you need to think about how you might want to cover other household bills and dependents’ living costs.

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again, a level term insurance policy would be more suitable but would cost more due to the higher sum insured.

Should I buy from my mortgage lender?

Although your mortgage lender may encourage you to purchase a policy and may even make life insurance a condition of granting a mortgage, you do not have to purchase any policy they offer.

It’s important to shop around to see who offers the best deal in terms of the coverage you need and the size of the premium.

How much coverage do I need?

Coverage is based on the size of your mortgage, how long it has to run, and the rate at which the amount you owe decreases over time.

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Keep in mind that while the amount of coverage you have will decrease over time, your premium will be calculated to stay the same from start to finish.

what are the alternatives?

The life insurance you choose should be specific to your needs. Mortgage life insurance may not be right for you, but another type of policy might:

Level Term Insurance Level Term Insurance pays a fixed lump sum to your dependents if you die during the term.

increasing duration insurance with an increasing duration policy, your coverage will increase year after year in line with, for example, the increase in inflation.

Death in Service CoverageThis type of life insurance is provided by your employer as an employment benefit. it is usually calculated as four times your annual salary, although it is worth checking what coverage is provided. the quantity you have may affect the quantity you purchase separately.

Should I add critical illness coverage?

Critical illness coverage provides an additional level of security in the event you become ill and are unable to work during the term of the insurance.

make sure you write your policy “in escrow”

When you buy life insurance, ask your insurance provider to write the policy “in trust.” doing so means that any policy payments are not included in your estate, but will be paid directly to the policy beneficiaries, as you choose.

writing the policy is a routine process that simply requires a signature from you.

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