Mortgage life insurance is a way of securing your house in the event of your death so that your partner or children won’t be left struggling to pay off the mortgage.
It would provide the funds to pay off your mortgage in total so that the house would then be owned by your family, rather than the mortgage lender.
What are the different types?
There are two types of mortgage life insurance, level term and decreasing term. Both will cover you for a set amount of time that you can choose. If you live beyond the policy end-date (or term) and you still want protection for your family, you would need to take out another life insurance policy.
For decreasing or level-term policies, most people would choose an end date that coincides with the end of their mortgage.
For level-term policies, people may choose the end date to be the retirement of their partner or when their youngest child would reach an age of financial independence, say 21.
This insurance is ideal for repayment mortgages because the lump-sum pay-out will match exactly the amount remaining on your mortgage, so your family won’t have to make up the difference.
With this, you would take out a policy for the total cost of your mortgage at the moment, let’s say £200,000. If you died the day after your policy started, your family would receive £200,000 to pay off the mortgage in full. However, if you died 20 years into the policy after paying £180,000 off your mortgage, your family would only get £20,000.
The good part about this policy is that your premiums, the amount you pay per month, would be lower than that of Level Term policies. This is because the longer you have the policy, the smaller the payout will be.
If you have an interest-only mortgage, then your best option would be a level-term policy because the lump sum pay-out would stay the same until the end of your policy. So a policy for £200,000 would pay out £200,000 whether you died the day after the policy started or after twenty years of regular payments. The lump-sum will not rise in line with inflation but neither will the premiums.
The pay-out will come directly to your nominated person or beneficiary so if you had potentially paid some capital off your mortgage your family will still receive the full amount of money.
How much will this cost?
There are many calculators available on the internet to work out exactly what you should be insured for. However, if you are on a strict budget it might be better to figure out how much you can afford to pay per month and tell the insurer, then they can tell you how much cover you can get. It’s better to be slightly underinsured than having no insurance at all or not being able to meet the premiums and having your policy cancelled.
How to find the best deals?
The best way to compare this type of insurance is to use an online comparison site or a discounted broker like Protected.co.uk. This way you can obtain quotes from ten of the top UK insurance companies without having to approach each insurer individually.