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Life Insurance For Mortgages

Life Insurance For Mortgages

If you’re thinking of buying a mortgage, then you ought to be thinking about taking out a life insurance policy too. Find out how using some of your income today can protect the financial interests of your loved ones if you pass away. 

Kamran Altaf
From the Life team
minute read
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Posted 16 SEPTEMBER 2020

What is mortgage life insurance?

Mortgage life insurance can be used to  help your dependants meet any future mortgage payments if you die.  This type of life insurance is often sold as a decreasing term  policy, and it  typically pays out as a lump sum. 
It’s designed to protect your loved ones in the event that you die before your mortgage is paid off, providing a lump sum to pay off your mortgage in full, relieving them of the financial burden at an already difficult time.

How does mortgage life insurance work?

As you pay off your mortgage over time, the amount of life cover you would get if the worst were to happen goes down – just as the outstanding balance of your mortgage does. This type of life cover is usually paired with a repayment mortgage, where monthly payments are used to repay the capital amount borrowed as well as any accrued interest. Learn more about how decreasing term life insurance works.

What’s the best mortgage life insurance cover?

The best mortgage life insurance cover will depend on you and your individual circumstances. For example, you may be slightly older or have a pre-existing medical condition that increases the cost of your policy. Whereas a younger person with no medical problems will get the same cover but at a cheaper cost. 

How much cover do I need for a mortgage life insurance policy?

You need to make sure that your mortgage life insurance policy covers the amount on your mortgage. Because of this, the specific amount of cover you need is different for everyone. These types of life insurance policies are commonly on a decreasing term, which means that the potential payout will reduce in line with your outstanding mortgage. So, make sure that you get enough cover to pay off your mortgage from the start, and align your policy to decrease in value alongside your mortgage repayments. 
An important thing to remember is that, if you were to move home, or change the length of your term, then you should reflect this change in your life insurance policy. Otherwise, you could leave yourself too short, with a payout that doesn’t cover your mortgage, or it could leave you overpaying for cover that you don’t need, or a policy that lasts longer than your mortgage.

How much does mortgage life insurance cost?

The amount that you pay for this type of life insurance may depend on: 

  • Your age 
  • Your health and medical history 
  • Mortgage amount owed 
  • Your salary 
  • Level of cover required 

You’ll often find that a mortgage life insurance policy will cost less overall than, say, a level term life insurance policy, where you might pay more to guarantee a pay-out which is fixed for the whole policy life. 

The best way to get an idea of how much you could expect to pay – and whether or not your dependants will get a lump sum after you die – is by doing a quick comparison with us, and telling us everything about you and the level of cover you need.  
While it may seem obvious to say, you’ll need to know how much cover you need and for how long. So, ask yourself what the outstanding balance on your mortgage is and how many years are left before you pay it off. Then simply answer a few personal questions about yourself and we’ll provide you with a range of quotes for life insurance from our panel of providers. 

Do you need life insurance for a mortgage? 

Whether you take out a mortgage life insurance policy is completely up to you. While it’s easy to get cover alongside your mortgage, it’s not compulsory. A mortgage life insurance policy is designed for peace of mind so that, should the worst happen, your family’s future in your home is secured. 

It’s quite common to take out a mortgage life insurance policy at the time of your mortgage, so it can easily be viewed as a small extension to your standard payments.

Can I get life insurance for my mortgage from my mortgage provider?

Yes, your mortgage provider may encourage you to take out a life insurance policy with them when taking out a mortgage. You may find that this is a convenient choice, pairing your mortgage and life insurance policy together with one provider. 
However, while they will try to convince you that it’s best to take out a policy with them, you’re under no obligation to do so. If you’d prefer to compare mortgage life insurance quotes first, to potentially finder a cheaper deal, then you’re completely free to do just that.

Can I put a mortgage life insurance policy in trust?

Yes, just like a standard life insurance, you can put your mortgage life insurance policy in trust. This is a good idea if you’d like to protect your payout from inheritance tax. If you were to die during your policy’s term, the payout would become part of your estate, which would then be subject to inheritance tax. If you write your policy in trust, this is then protected and pays out directly to your trustees. 
The process of writing your policy in trust is quite straightforward, but discuss this with your insurance provider, who will also be able to advise you on the process. If you’re still unsure about something, or your financial situation is particularly complicated, it’s best to seek advice from either a solicitor or financial expert.

What else should I consider?

So, all you’ll need to do is compare the various options and policy details to find cover that’s right for you. If you’d like some advice on life insurance for a mortgage, contact one of the advisers at LifeSearch. Give them a call on 0800 072 1147. (Mon-Thurs 8am - 8pm, Fri 8am – 7pm, Sat 9am - 2.30pm and Sun: 10 am - 3.30pm). 

Can I cancel my life insurance policy?

You can cancel your life insurance policy at any time. However, your cover will end and you’ll no longer be able to make a claim. If you decide to cancel your life insurance policy, you won’t get a refund for the premiums you’ve already paid. 
Most life insurance providers will offer an initial period which will allow you to cancel your policy free of charge. This is usually around 30 days, and will offer you a refund for any premiums paid within this period. Be sure to check your documents carefully, to find out if you are offered this period, how long it lasts, and when it begins. This is normally from the day that you receive your policy documents.

Is there a difference between life insurance and mortgage life insurance? 

Life insurance is more of a general form of cover. It comes in many forms, but the beneficiary receives a payment upon your death that can be used however they wish. Mortgage life insurance is specifically designed to cover the remaining amount owed on a mortgage.

Should I have two single policies or joint cover? 

While one joint life insurance policy can be cheaper than two single policies, it comes at another cost. Should you break up, the policy cannot be split between you, leaving any premiums you’ve been paying lost if you cancel the policy. Couples who have made previous financial commitments together are perhaps the most suitable for joint cover. For instance, if you’re home owners, a joint policy can pay off the remainder of the mortgage for the other. 

Taking out two single life insurance policies offers you the flexibility to list additional beneficiaries and change them depending on your situation. While they can be more expensive, you may find that ability to change your policy more easily a worthwhile deal. 

Should I get critical illness cover with mortgage life insurance?

If you’d like that additional security, critical illness insurance is available through many insurance providers as either an addition, or in combination with your existing mortgage life insurance policy. With a policy addition, you’ll receive separate payouts, one for critical illness and another upon death, whereas with a combination policy, you’ll receive one payment for either illness or death. If you fall ill and are unable to work, critical illness cover provides a lump sum payment that can pay off, or pay towards, your mortgage. 

Will I be covered if my mortgage provider goes bust?

If your mortgage provider goes bust, during the period of your mortgage and life insurance policy, your cover will be protected. The Financial Services Compensation Scheme (FSCS) will transfer your policy to another insurance provider, or issue a replacement. This should see your cover relatively uninterrupted. 
If you were in the process of making a claim when your mortgage provider went bust, this can be slightly more complicated, but the FSCS will cover you for this as well. However, the process of continuing your claim may change.

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