Life Insurance vs Mortgage Life Insurance

What's the difference?

If you are the main breadwinner in your family, you are likely to have loved ones who rely on your income to pay the bills.  Making sure this income continues should you become ill or die is likely to be of crucial importance.  There are many options when it comes to considering how to do this, and life insurance is one particular product that can help.

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One of the most important decisions you'll face is whether to take out a policy that only seeks to pay off your mortgage in the event of your death, or, if you should choose cover that will provide your family with a lump sum that will pay off this debt with plenty to spare?

The first step to finding the answer is to understand the difference between the two insurances.

What is life insurance?

The purpose of life insurance (which can also be called life assurance) is to pay out a lump sum, a series of smaller sums, or even a monthly income, should you die unexpectedly.

The most basic kind of cover is called term life insurance. This will apply to a given timeframe – typically 25 years. If you die within this period, your beneficiaries will receive a lump sum. If you don’t, you will stop paying the premiums after the term has lapsed and the cover will cease.

So-called ‘whole of life’ policies are available too. These do what they say on the tin and pay out whenever you die. For this reason, they tend to be more expensive and more complex, such as being linked to investments such as endowments.

When running quotes to find life insurance, you can choose how much you want your life cover to pay out. This is known as the ‘sum assured’. 

The amount of the sum assured will depend on a combination of your circumstances and the premiums you can afford to pay each month.

Life insurance and mortgage life insurance options

Within term insurance are various sub-options which you will also need to consider. If you just want mortgage life insurance – in other words a payout that will cover only your outstanding mortgage – then decreasing term is likely to be the most suitable option.

This is when the sum assured reflects the amount outstanding on your mortgage at all times.  So, as your debt to the mortgage lender decreases, so does the amount paid out by the insurer on your death. However, your monthly premiums remain the same.  Decreasing term life insurance sits best alongside a standard repayment mortgage on which the capital reduces consistently over the years.

Level term insurance is when the payout is fixed over the term, regardless of your decreasing mortgage debt. This means that your beneficiaries will have a payout that is bigger than your outstanding mortgage should you die. For this reason, monthly premiums for level term cover are more expensive than for decreasing term cover.

Increasing term insurance is more expensive still because the benefit actually increases with each year of the insurance term – typically by five or 10 per cent.

Policy extras

With life insurance and mortgage life insurance, you can opt to add on extras.  One of the most important of these is critical illness insurance, which can otherwise be taken as a standalone policy.

Critical illness cover pays out if you contract one of a list of conditions, ranging from a heart attack to Parkinson’s disease, so long as it is severe enough to meet the rather grim definitions stated within the policy’s terms and conditions.

When critical illness is combined with life insurance, the payout will occur only once on whichever morbid event happens first – death or contracting a serious illness.

Your quote

Monthly premiums for your life insurance policy will hinge on the sum you want to insure, any extras you opt for, as well as your gender, health and life expectancy. This means the younger and fitter you are when you take out the policy, the cheaper your premiums will be.

We all want to find cheap life insurance and easy ways to shave money of the price of your premium include; quitting smoking, reducing the units of alcohol you consume on a weekly or monthly basis and losing weight if you are considered to have an above average BMI (body mass index).

Remember, it’s also always worth shopping around for the best deal ensuring that you never compromise on the level of cover that you need.

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