Mortgage Life Insurance

If you have a, partner, loved ones and/ or dependants who rely on your salary – and the roof over your heads is funded by a mortgage – making plans in advance as to how it will be paid in the event of your unexpected death is crucial.

The solution to this bleak problem is mortgage life insurance, which also goes by the name of mortgage life assurance.

Save money on your life insurance

But mortgage life cover is not really a product in its own right. It is simply a version of life insurance that will pay out enough money to clear your mortgage debt – or clear it with some cash to spare – in the event of your death.

So how does mortgage life insurance work?

Different types of policy

Mortgage life insurance takes three main forms depending on what you want the pay-out (known as the sum assured) to achieve. These are known as decreasing term, level term and whole of life mortgage life insurance.

Decreasing term mortgage life insurance

Decreasing term cover is when the sum assured is relative to the amount outstanding on your mortgage. So, as your debt to the mortgage lender decreases, so does the amount paid out by the insurer over the term, which is typically 25 years. 

For example, if in year one, your outstanding mortgage is £200,000, this is the sum that would be paid out to your beneficiaries if you die. If, in year 24, the outstanding sum is £1,000, this is the sum that would be paid out if you die. Your monthly premiums however, remain the same.

It’s important to note that decreasing term mortgage protection life insurance is only suited to people who have repayment mortgages on which the capital as well as the interest is reduced over the years. 

Level term mortgage life insurance

Level term life insurance is when the sum assured remains fixed for the term. So, the same £200,000 will be paid out in year one or year 24 of your mortgage.

These kinds of policy are designed to create a surplus of funds over and above your mortgage debt to pay for other expenses such as a car, school fees, bills and general living. For this reason, the monthly premiums – which remain fixed over the term of the policy – are more expensive.

Whole of life insurance

Mortgage life insurance could also be taken as a whole of life policy which will pay out whenever you die. The premiums – which are linked to investments such as pensions or endowments – are more expensive than on level term mortgage life cover. And, if the investment fund does not perform to target over the years, there is a risk they can increase.

Mortgage life insurance extras

Once you have decided on the right policy as well as the appropriate sum assured, you can opt to add on extras to your policy.  One of the most common is critical illness cover.

This 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 your policy’s terms and conditions.

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

You can also choose to add a waiver premium onto your policy, whether it’s level term, decreasing term or whole of life.

This will permit you to cease paying the premiums if you were unable to work as a result of illness or injury.

How will my mortgage life insurance quotes be calculated

Your mortgage life insurance will be calculated, rather brutally, on the likelihood of you dying. This means, your age, sex, health and gender will all be considered in arriving at a monthly premium for the sum assured you have applied for.

You can always shop around for cheaper mortgage life insurance quotes, but in doing so, be careful that you do not forfeit any cover that you need.