What's the difference between life insurance and mortgage life insurance?
Find out if mortgage life insurance or standard life insurance is suited to your financial and family needs.
What is mortgage life insurance?
Mortgage life insurance is designed to clear the outstanding home loan if you die within the term of your mortgage. It is also called decreasing-term life insurance.
Mortgage life insurance works by buying the policy for a specific period of time – or ‘the term’. The policy should typically be worth the same value as your mortgage, but the value of the policy falls as the debt is paid off. Should you pass away during the term of the policy, your dependents will have enough money to clear the mortgage, so the home will remain secure.
What is level-term life insurance?
Level-term life insurance lets you pick how much you want the insurance to pay out and how long you want it to last. Your loved ones will get the full payout if you pass away within the term of the policy. This could then be used to clear a mortgage alongside any other debts or provisions for your dependants’ future financial security.
Is mortgage life insurance cheaper than level-term insurance?
Mortgage life insurance is typically cheaper than level-term life insurance. This is because the size of the payout from a mortgage life insurance policy decreases over the term of the policy, in line with the continuing reduction in your mortgage debt. Meanwhile, the amount of cover is constant throughout a level-term life insurance policy.
Is mortgage life insurance right for me?
Mortgage life insurance could be an option if both you and your partner would be earning enough to cover standard household bills and there are no other dependants.
Here’s an example. You and your partner each earn £30,000 and have a repayment mortgage of £150,000, but no children. Your partner could struggle to pay the mortgage without your salary but could manage other living expenses. Therefore, mortgage life insurance might be suitable because it would ensure your partner could keep the roof over their head.
Oppositely, if your partner was taking a career break to look after young children, or earned only a small income, level-term insurance may be more appropriate. The money made available after you die could pay off the mortgage and make provisions for your family’s financial security.
Level-term insurance is also the better option if you have an interest-only mortgage. This is because you only pay off the interest each month, so the capital debt remains the same.
Using MoneySuperMarket’s life insurance calculator will help you decide how much cover you need in a few easy steps.
What are the pros and cons of mortgage life insurance?
While mortgage life insurance is typically cheaper than level-term life insurance, it’s worth weighing up whether it’s the best option for your family after you pass away.
Some good reasons to get a decreasing-term policy are:
Mortgage life insurance is usually cheaper than level-term insurance.
The payout will clear any outstanding mortgage debt if you die within the term. This allows your loved ones to remain in the family home.
But the drawbacks to decreasing-term life insurance include:
Mortgage life insurance will provide only enough cover to clear the outstanding mortgage debt. It does not pay off any other debts or make provisions for your family’s future financial security.
It is not suitable if you have an interest-only mortgage, as you still need to pay the full capital sum back at the end of the mortgage term.
Find life insurance deals for your needs with MoneySuperMarket
Some mortgage lenders request you take out appropriate life insurance when you arrange your mortgage.
It’s important to remember that you do not have to buy cover from your lender, and it’s often cheaper elsewhere. You should also compare quotes for both level-term and decreasing-term life insurance, as you could buy more cover for little or no extra cost.
Finding the right life insurance policy is easy when you compare quotes with MoneySuperMarket. Just tell us a little about yourself, your circumstances, and the cover you need, and we’ll put together a list of quotes tailored to your requirements.
You’ll be able to compare deals by the overall cost and the cover you’ll get, and once you’ve found the one you want, just click through to the provider to finalise your purchase. As with all insurance products, the cheapest option may not be the best – we recommend balancing cost and cover to ensure you have the right policy.