Having to pay off your mortgage is a big commitment. When you are not around, you do not want your loved ones to be worried about how they are going to manage to make the repayments.
Even if you’re not earning a salary, your contribution to the household is still invaluable. How would your family cope and make ends meet without you?
If you have a mortgage life insurance, it will help your family pay off the mortgage in case you pass away during the period of the policy. This way you do have to worry about your loved ones selling up any property or downsizing to make the repayments.
For those who do not know, mortgage life insurance is also known as decreasing life insurance which covers your mortgage repayments in the case you are unable to make them (i.e. if you die before you pay the mortgage off completely).
The amount you are covered for decreases in line with how much your mortgage reduces over the course of your policy.
Things You Need To Check While Taking A Mortgage Or If You Have Taken A Mortgage
There is one policy that you need to check for while you are taking out a mortgage or if you have already taken out a mortgage.
The policy is none other than the infamous Payment Protection Insurance (PPI). PPI policies are sold alongside loans, mortgages and credit cards and help you to pay your debt when you are unable to make payments due to illness, unemployment or death.
Most PPI policies have been mis-sold to customers by their banks or lenders. As these policies are being mis-sold to anyone and everyone, not everyone can move on to make a claim to get a compensation. This is because they are not eligible to make a claim.
If you want to check for any such policy under your name and that it was sold to you without your consent, you can go through all the paperwork related to your mortgage. If you find out that you were mis-sold the PPI policy then you can move on to make a claim all by yourself.
The average PPI pay-out is about £2000, so by claiming your refund, you could be in line for small and unexpected windfall.
The bottom line is that you need to read through all the documents carefully, when you are applying for a mortgage. The PPI incident proves that it is very possible that additional unnecessary policies could be added on to your orignal agreement, increasing your premiums in the process.
Why Should You Consider Taking Mortgage Life Insurance?
Mortgage repayment is perhaps the single largest financial commitment that you have to fulfil every month. This would continue even if you die unexpectedly, making your family members and dependants solely responsible for making any further payments.
Having mortgage life insurance provides you with some peace of mind.
It also assures you that even if something was to happen to you, your family members won’t be forced into an unwanted change of lifestyle. Therefore, it is a good idea to consider having this type of life insurance.
Types Of Mortgage Life Insurance
The type of policy you choose depends on your personal circumstances and the payments your family members are required to make if you were to die unexpectedly. There are three different kinds of mortgage life insurances that you can consider:
Decreasing Term Insurance
A decreasing term life insurance covers your mortgage, which means that the pay-out sum reduces in line with the total amount of your mortgage debt.
In other words, it means that if your mortgage term is for 20 years then your insurance policy term will also be for 20 years. Basically, the insurance policy term will be exactly the same as your mortgage term.
If you have decided to opt for a decreasing term insurance, remember to check if it comes with a Mortgage Interest Rate Guarantee. Mortgage Interest Rate Guarantee ensures that if if the interest rate of your mortgage 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 the first year of your policy, the amount the insurer would pay out would be £150,000 – therefore clearing the rest of the debt.
Alternatively, if you happen to die 20 years into a 25-year term policy, the amount you are yet to pay on your mortgage would have reduced by then. So, this policy will pay off the remaining amount on your mortgage.
For example, if you still have £15,000 remaining, the policy would pay out £15,000 in the event of your death.
This policy is not suitable for people who have an interest-only mortgage because in this type of policy you only pay the interest on the capital amount and not the capital amount itself.
It is more suitable for people with repayment mortgages, who basically repay their mortgage debt off over the term of their deal. A decreasing term insurance policy has lower monthly premiums.
Level Term Insurance
The level term mortgage life insurance is much easier to understand. The amount of money stays the same throughout the duration of your mortgage.
Assume that you took a policy for £150,000, this is the amount that your provider will pay you regardless of when you die. The amount that you receive will remain the same if you die in the first year or twentieth year of policy term.
Depending on when you die, the benefit of using the level term insurance is that your family member will receive more amount of money through the insurance funds.
The amount your beneficiary receives will be more than enough to pay off the mortgage. For example, if the remaining amount to pay off your debt is £15,000, your family members will still receive £150,000.
The amount that remains after they pay off the mortgage debt completely is more than enough for them to manage their living cost and bills.
It can also be used to offset the loss of income through your salary. As the amount in this policy does not decrease over time, the monthly premiums are higher than that of the decreasing mortgage life insurance.
Whole Of Life Insurance
The third type of policy called as the whole life insurance policy. The whole of life insurance policy is not a fixed term policy (policies that particularly lasts for 25 to 30 years) and it pays out whenever you die.
Since the cover can expand to several decades and there is no set term, the monthly premiums of this policy are gradually higher than the fixed term policies. These premiums are linked to investments.
Therefore, if the investment growth is lower than it is expected to be, your premiums can increase substantially over time.