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There are two types of life insurance that can help pay off your mortgage if you die. Find out how they work and which option might provide the right cover to protect your family and their home.
This type of life insurance, also known as mortgage protection or decreasing term life insurance, is designed to cover your repayment mortgage.
The length of your policy should match your mortgage term, with the amount covered decreasing each year as you gradually pay off your mortgage.
In theory, your mortgage balance and the amount of life insurance cover you have should both reach zero at the same time.
Having this in place means if you die unexpectedly, your mortgage balance will be cleared which will protect your home for your loved ones.
With level term life insurance, the amount covered stays the same for the length of the policy and isn’t linked to your mortgage.
You choose how long the cover will last, known as the policy term, and the amount you want to be covered for.
If you die unexpectedly during the policy term, your loved ones will get a payout for the full sum insured.
They can use this money any way they choose - for example, to pay off a mortgage or to help with any other debts or general living expenses.
Yes, because the level of cover decreases over time in line with your mortgage balance, so premiums generally cost less.
On the other hand, level term life insurance will pay out a fixed lump sum to your loved ones if you die at any point during the policy term. And you can choose an amount that will cover more than just the mortgage.
Because the payout sum is fixed, a level term policy is usually a more expensive type of cover.
However, there are other factors that can affect how much you’ll pay, such as your age and medical history.
This will depend on your situation, whether you have others to provide for and the type of mortgage you have.
A decreasing term insurance life policy could be a good option if you’d like your family to have enough money to pay off the mortgage balance if you passed away at any point during the policy term. This type of cover is particularly suited for repayment mortgages and is usually a cheaper option when it comes to monthly premiums.
If you’d prefer more flexibility or you have an interest-only mortgage, a level term policy might be a better option. You can choose a set amount to cover all your family’s needs and match the fixed balance you’ll have to pay at the end of your mortgage term. Plus, it can extend beyond your mortgage term as the two aren’t linked.
There are potential benefits and drawbacks that you should consider when you’re trying to decide which type of cover you want.
When you’re taking out cover, there are some other factors you should think about before you apply, including:
You’ll need to decide how much money you’d like your family to receive. Ideally, it should be enough to cover your mortgage. You should also think about giving your family financial protection on top of this to help with other costs they might face.
When you’re deciding on the payout amount, you should also consider inheritance tax. Some life insurance policies can be written into trust so the payout won’t be subject to any inheritance tax as it’s not classed as part of your estate.
If you choose a mortgage life insurance policy, your cover should last as long as your mortgage term. You can choose the length of cover with a level term policy, this can typically be anywhere from 10 to 30 years.
You can take out cover as an individual or jointly with your spouse or partner. However, if you decide on a joint policy, be aware that this will only pay out on the death of the first policyholder, after which the surviving policyholder won’t be covered.
It’s possible to add critical illness cover to your life insurance policy. This can provide financial protection if you’re diagnosed with a serious insured illness, like a heart attack or certain types of cancer. The cash payout can be used to help with mortgage repayments, but this type of cover will increase your monthly premiums.
Mortgage or decreasing life insurance is usually cheaper than level term insurance, but how much your premiums will cost depends on other factors including:
Life insurance gets more expensive when you’re older. So the younger and healthier you are when you take out cover, the cheaper your premiums will be.
Life insurance isn’t a legal requirement, and most lenders won’t normally ask you to have life insurance when you’re applying for a mortgage.
However, it can be a good idea to give yourself some extra financial security, especially if you have children or other dependants.
If you don’t have life insurance and die before your mortgage has been paid off, whoever inherits your home may have to sell it in order to pay the lender the outstanding amount.
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