Mortgage Life Insurance
Protecting you and your home...
What does Mortgage
Should you die within the policy term the cover pays out a lump-sum that can be used repay the mortgage loan.
Leading life assurance policies can also payout early if you are diagnosed with less than 12 months to live by a medical practitioner.
Critical Illness Cover
This option also enables the plan to payout if you were to suffer any one of around 35 to 40 conditions named in the policy terms.
You pass away during the policy term (set equal to your mortgage length).
Stage 2:Your family make a claim with the insurer (including your death certificate).
Stage 3:The insurer pays the sum assured either into trust or directly to a joint policyholder.
Stage 4:Those life insurance funds can then be used to repay the mortgage loan in full.
Do I need Mortgage
Although mortgage life assurance is not compulsory it is worth considering this plan if your family would struggle to keep up with the loan repayments if you passed away.
What is the risk of passing away?
Based on ONS life expectancy data (2008-10), someone with a 25 year mortgage term would have the following chances of passing away before the loan is repaid:
As the chances of suffering a critical illness is far higher than death it definitely makes sense to consider adding this option to your policy.
1. Choose your level of cover
This is usually set equal to the amount of debt still outstanding on the mortgage so the loan can be cleared in full should you pass away.
2. Choose your length of cover
This is often set equal to the length of time the loan has left to run so repayment can be made if you die at any point during the mortgage.
3. Level or decreasing cover?
Level term life insurance is usually used to cover an interest-only mortgage and decreasing term life insurance is commonly used to cover a repayment mortgage.
The purpose of mortgage protection life insurance is to cover your home loan in the unfortunate event that you pass away. The plan would payout a tax-free lump-sum to repay the loan in full should you die within the policy term.
Suitable mortgage life cover can be arranged whether you have a capital repayment mortgage (decreasing term insurance) or an interest-only loan (level term insurance). It is also sensible to consider adding critical illness protection to your plan in order to cover the risk of serious illness or injury.
Joint Mortgage Protection: If you have a joint mortgage with your partner it is possible to take out a joint life insurance plan so that the policy would payout should either partner pass away. This means that the remaining partner would have the funds necessary to repay the mortgage and not have to struggle financially to meet the loan repayments on their own.
Mortgage life cover (sometimes known as mortgage death insurance) is a very common form of family protection. When deciding whether you need this insurance it is important to consider what the consequences would be if you were to pass way. If you have a family would they still be able to keep up with the mortgage repayments? If the answer is 'no' then life cover is usually a sensible form of long-term financial planning.
Mortgage protection life insurance is very popular with couples taking out a joint mortgage as the monthly loan repayments are often based on the income of both partners. If one partner were to pass way this would often leave a financially unmanageable loan for the remaining partner.
With a decreasing term life insurance plan the level of cover declines over time, reaching zero by the end of the policy term. This type of life cover is designed to protect a capital/principal repayment mortgage where the amount outstanding on the loan declines to zero over time (i.e. the home is owned outright by the end of the loan term).
Decreasing term insurance is the most cost-effective form of life insurance for mortgages as the risk to insurer declines over time as the level of cover falls. This enables the premium rates to be far lower than with traditional level term life cover.
One important point to note with this type of policy is that the level of cover declines in accordance with an assumed interest rate, much like the amount outstanding on your home loan. Most plans automatically assume a rate of 8 to 10 per cent, which provides some flexibility for mortgage interest rate fluctuations.
With level term life insurance the amount of cover remains fixed over the life of the plan. This means that if you take out a plan with £200,000 worth of life cover today, for example, this amount of protection will remain fixed at £200,000 right up until the end of the policy.
This type of protection plan is most suitable for covering an interest-only mortgage loan as the amount outstanding on the loan remains fixed over time, and therefore so should the amount of life cover.
When taking out mortgage life insurance protection it makes sense to consider the option of adding critical illness insurance to your plan. Including this option means the plan would also payout a lump-sum should you suffer a 'critical illness' (serious illness or injury) defined in the policy schedule.
Leading plans cover over 35 critical illness conditions, including various types of cancer, heart attack, stroke and diseases of the central nervous system (multiple sclerosis and Parkinson's disease, for example). In addition to illness, plans also cover physical injuries such as total permanent disability, loss of limbs, blindness and coma.
When deciding whether or not to include critical illness cover it is important not only to consider your current health and lifestyle risks but also to plan ahead for the future, mortgages tend to run for a very long time. Rates for this cover do rise considerably with age so it usually makes sense to take out a plan on guaranteed (fixed) rates as young as possible.
There is generally no need to write life insurance for mortgages into trust as the payout from the insurer is destined for the mortgage lender and not to be passed on as inheritance. This is especially the case with joint life plans as the remaining partner would receive the funds from the insurer and repay the lender directly.
However, it may be worth setting up a discretionary trust for a single life plan as the payout could be paid through the trust directly to your chosen beneficiary (most likely your partner), who could then repay the loan. This set-up would be much quicker and far less hassle compared to going through the probate court process for the lender to obtain those funds from your personal estate (which can often take over 6 months).
As independent mortgage life insurance brokers we are ideally placed not only to obtain you the cheapest quote from our large panel of insurers but also to provide impartial advice, ensuring that you get the right cover for your needs.
Whether you have a quick policy question or require a complete review of your mortgage protection set-up we are here to help. It is our job to ensure you have all the information needed to make as informed decision as possible.
10/01/2015 N Tanner
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