What is mortgage life insurance and decreasing life insurance?
Mortgage life insurance, also known as decreasing life insurance, covers your mortgage repayments in the event of your death. The amount you are covered for decreases in line with how much your mortgage reduces by over the course of your policy. The average monthly premium of a policy is £24.91, according to MoneySuperMarket data (April 2017)*.
Why should I take out mortgage insurance?
Your mortgage is almost certainly the single largest financial commitment you have every month. And if you were to die unexpectedly, the family and dependants you leave behind would still be responsible for continuing to make these payments.
Having such cover in place provides peace of mind, knowing that your family and dependants won't be forced into an unwanted change of lifestyle.
If you own a house and have dependants who rely on you to pay the mortgage, it's therefore a good idea to consider this type of life insurance.
Different types of policy
There are three different kinds of mortgage life insurance to consider. The right policy for you will depend on your individual circumstances and the level of payout your family and dependants will require in the event of your death.
Decreasing term insurance
Decreasing term life insurance for mortgage cover is a type of policy where the payout sum reduces in line with your total mortgage debt. The term of your policy will match that of your mortgage – so if your mortgage term is 25 years, your policy term will also be 25 years.
Most policies come with a Mortgage Interest Rate Guarantee (remember to check this on the policy you choose), and so long as your mortgage interest rate is below this guarantee, your policy should pay off any outstanding balance.
For example, if you took out a £150,000 mortgage and died in year one, the amount the insurer would pay out would be £150,000 - therefore clearing the rest of the debt.
If, however, you died 20 years into a 25-year term, the amount you still owed on your mortgage would have reduced. So if you still had £15,000 remaining at this point, the policy would pay out £15,000 in the event of your death.
This kind of policy is suitable for people with repayment mortgages, who repay their mortgage debt off over the term of their deal - not for those who have interest-only mortgages. This is because, with this type of mortgage, you pay only the interest on the capital borrowed and not the capital itself.
A decreasing term mortgage life insurance policy tends to have lower monthly premiums.
Level term insurance
Level term mortgage life insurance is easier to understand. The sum assured stays fixed throughout the duration of your mortgage - so if you take out a policy for £150,000, that's the amount the provider will pay out regardless of when you die; one year or 20 years in, the amount is the same.
The obvious benefit with level term insurance is that your dependants will usually receive more funds than are needed simply to pay the remainder of the mortgage off, depending on when death occurs.
For example, it may be that they receive the £150,000 when the mortgage debt stands at just £15,000. This means they have a tidy sum and additional funds for other commitments, such as living costs and bills. It can also be used to offset the loss of income through your salary.
Because the sum doesn't decrease over time, monthly premiums are higher than for decreasing mortgage life insurance.
Whole of life insurance
A third option is something known as a whole of life insurance policy. This pays out whenever you die, so instead of a fixed term policy - which typically lasts for 25 or 30 years - cover is continually provided.
Because there is no set term and the cover could potentially span several decades, monthly premiums tend to be higher than with fixed term policies.
Premiums are also linked to investments, so if investment growth is lower than expected, your premiums can increase substantially over time.
Critical illness cover
Critical illness cover is offered as an extra to mortgage life insurance and level term life insurance policies - you may already have cover in place but this can be added as an additional policy.
Critical illness is designed to pay out if you are suffering with a serious condition - such as cancer, a stroke or heart attack - which affects your ability to work. Coverage varies depending on the insurer, so check the terms and conditions carefully.
If you take out a combined critical illness critical illness and life insurance policy, that policy will only pay out once - you wouldn't receive a sum upon diagnosis of serious illness and then again should you die during the term of the policy's coverage.
Getting a quote
Ultimately, the amount you pay for your mortgage life insurance every month will be defined by a number of factors, including the size of the cover you need, the length of time you want the policy to run for and any additional extras - such as critical illness.
Your age and health will also be taken into consideration. If you are a heavy smoker or have suffered with a serious health condition in the past, your premium is likely to be higher than a non-smoker or an individual with better health.
Try to compare a wide range of life insurance policies to get the best possible deal for you and your lifestyle. Remember that cheapest isn't always best - check exactly what your policy covers before buying it.
* Based on all mortgage life-only insurance quotes run in April 2017 with cover term more than 25 years and a cover amount of more than £100,000. The price you are quoted is dependent on your individual circumstances so might differ from this figure.