Why Decreasing Term Mortgage Life Insurance?
Decreasing term life insurance pays out a tax free cash lump sum to pay off your mortgage should you pass away.
Provides you with peace of mind your loved ones will be financially safe should the worst happen.
Include critical illness insurance to cover the mortgage should you suffer a serious illness such as cancer.
Speak to our expert advisers or get an instant quote online comparing the UK’s leading insurers.
What does decreasing Mortgage Life Insurance cover?
Should you die within the term of the policy this type of cover would payout 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.
How does Mortgage Life Cover work?
You pass away during the policy term (set equal to your mortgage length).
Your family make a claim with the insurer (including your death certificate).
The insurer pays the sum assured either into trust or directly to a joint policyholder.
Those life insurance funds can then be used to repay the mortgage loan in full.
Do I need repayment Mortgage Life Assurance?
When deciding if mortgage protection insurance is worthwhile it makes sense to know the facts about what risks we all face:
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:
25 years old
35 years old
45 years old
1 in 33
1 in 15
1 in 6
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.
Your Key Options
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.
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.
Include critical illness cover
This is an option that can be added to your life insurance policy so the mortgage can be repaid should you suffer a critical illness condition.
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How does decreasing mortgage life insurance work?
As mentioned above, the purpose of decreasing term mortgage life cover is to protect a principal repayment mortgage loan as the amount of cover decreases over time so as to stay in-line with the amount of debt outstanding on the loan, which is the most cost-effective method of gaining this type of life protection.
In order for the amount insured under the plan to decline over time the policy assumes an interest rate. If this policy interest rate is set equal to your mortgage interest rate the cover will decline exactly. In reality most plans automatically assume an interest rate of 8 per cent to 10 per cent to allow for fluctuations in your loan interest rate over time.
Covering you and your partner
If you have a joint home loan then it is perfectly reasonable for you to want to take out joint mortgage life cover with your partner to protect that loan.
The joint decreasing life insurance policy would payout the full amount upon the death of the first partner, leaving the other partner with the necessary funds to repay the loan. As the remaining policyholder would receive the payout directly there is no need to write the policy into trust for tax avoidance reasons (the insurer’s payout would be free from taxation).
Including critical illness cover
There is the option to include critical illness cover with your policy, this would payout a lump sum if you were to suffer a critical illness specified in the policy document.
Leading policies include approximately 35 critical illness conditions, including cancer, heart attack and stroke. Please note that if the combined life and critical illness policy pays out due to either a critical illness condition or a life claim the policy would then terminate.
Family flexibility benefits
A number of insurers offer increased flexibility options with their decreasing term life insurance plans. These options give the policyholder the choice to increase the level of cover without further medical underwriting due to specific lifestyle events.
Options to alter your protection – For example, common lifestyle events include moving house, home improvements or the birth of a child. It is also common for these life plans to include a separation option to form two new policies without further medical underwriting if a couple were to part ways. If your policy includes critical illness cover there is usually a certain level of child cover included as standard.
The children’s critical illness benefit is usually the lesser of £20,000 or 50% of the critical illness cover included in the policy. Please note that these family flexibility benefits do vary from provider to provider so you should always check the policy wording document.
Waiver of premium
Including the waiver of premium option means that the insurer will ‘waiver’ your monthly premium payments if you were to suffer illness or injury and therefore be unable to earn an income. Without the waiver of premium option you would run the risk of missing premium payments and therefore losing your mortgage cover if you lost your income due to sickness or injury.
Including waiver of premium adds around 2% to 4% to the monthly premium charged. Please note that there is often an excess period of around six months before the waiver of premium would kick in, but once it does begin it can last until you either return to work or the decreasing term insurance policy ends.
Do I need advice?
If you would like some more information, some guidance or simply want to compare decreasing mortgage life insurance quotes from the leading insurers, please do not hesitate to get in touch we are here to make your life easier, call us on 0208 432 7333. For more information please visit our dedicated mortgage life cover page.
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