Whether you already have a mortgage or plan to get one, there’s never a better time to have protection in place. With costs only going up, you could run the risk of leaving your family in a vulnerable financial state. However, mortgage life insurance can help your family pay off your home’s mortgage, should anything happen to you.
In this article, we’ll cover the different types of mortgage life insurance as well as tips for buying cover…
What is mortgage life insurance?
Buying a home is a big milestone in life, however, if you die before your mortgage has been repaid, it doesn’t just disappear. Instead, your lender will expect your loved ones to continue making payments, otherwise, they may have to move out of the property.
Mortgage life insurance is a general term for a range of policies that can be used to cover a mortgage. When you die the policy pays out a lump sum which your family can use to make repayments on a mortgage. That way your loved ones can have peace of mind knowing your home is protected should the worst happen.
Here are a few tips for buying mortgage cover…
1. Understand the different types of mortgage life insurance
Two main types of life insurance cover can be used to protect a mortgage. These are whole life insurance and term life insurance. Both of these cover types have benefits and work in different ways that you should know about.
Term life insurance
Term life insurance policies cover you for a set number of years also known as the ‘policy term’. If you die within this time, the policy pays out a lump sum to your loved ones, which can be used to help with costs like mortgage repayments.
However, if you survive the policy term – which shouldn’t be a bad thing! Your policy expires and you won’t receive any money in return for the premiums you have already paid.
Despite this, term life policies are generally cheaper than whole life – which covers you permanently.
There are two types of term life cover that can be used to cover a mortgage:
- Level term cover – The cost of your monthly premiums and pay-out amount are fixed throughout the length of the policy. Level term come is best suited if you have an interest-only mortgage.
- Decreasing term cover – This type of cover is designed specifically to cover a mortgage and other large payments. The pay-out value decreases over time as you make repayments on your mortgage.
Whole life insurance
With whole life insurance, the name alone provides a hint to how it works. This type of policy covers you for the rest of your life, paying out a cash lump sum to your loved ones when you eventually die. This money can help your family pay off your home’s mortgage, should you die before it’s repaid.
Although whole life cover can be expensive, your family has the benefit of knowing they receive a payout no matter when you die. In this case, your mortgage may have been paid off, so the pay-out can be used towards other costs.
2. Consider Joint Cover
If both you and your spouse share responsibility for a mortgage you may want to consider getting joint life insurance. A joint policy can cover two people under a single policy, working out cheaper than buying two single policies.
Most joint policies work on a first death basis, which pays out after the first death in the couple. The policy then ends, so the surviving party would need to take out further cover if needed.
There is also a second death option – this pays out after both you and your spouse have died. The pay-out can then be used towards supporting your children.
3. Work Out how much cover you will need before you buy
If you’re buying a life insurance policy to cover a mortgage, you should make sure to take out the right amount of cover. This can depend on the type of policy you opt for.
For example, if you have whole life insurance, your mortgage may have already been paid off when you die. In that case, you can still help your family with additional finances such as:
- Living expenses
- Household bills
- Funeral costs
- Childcare support
- To leave your children a gift
Whereas, if you have a term life policy, your family may only need the necessary amount to cover the mortgage.
The main difference between term life and whole life is the cost and length of cover. Term life is cheaper but only covers you for a certain amount of time, whereas whole life is more expensive yet provides permanent cover.
If your family has a reverse mortgage:
One of the costs associated with a reverse mortgage is mortgage insurance, which is typically 2% of the total loan amount and is paid upfront. This insurance is designed to protect the lender in the event that the borrower’s estate is unable to repay the loan when the home is sold.
Because reverse mortgages are non-recourse loans, the borrower’s estate is not liable for any debt that exceeds the value of the home. The mortgage insurance is expensive, but it offers protection for the borrower’s estate if the home ends up being worth less than the outstanding loan balance when it is sold.
4. Be honest when answering health questions
When you apply for a quote for life insurance, your insurer will ask you some health and lifestyle questions. This helps to calculate an estimate of how much your monthly premiums will be during the policy.
The questions your insurer may ask are typically regarding:
- Your age
- Health
- Occupation
- The type of cover
- The length of cover
- The outstanding balance of your mortgage
It’s important to answer these questions as truthfully and accurately as possible otherwise your cover may be void. Even worse, your family could be denied a payout after you’ve died.
With life becoming more and more unpredictable, it’s always better to be safe rather than sorry. Apply for mortgage life insurance, today to protect your family and your home.