Personal Finance News
What our customers say..."You're doing a grand job"
An Introduction to Life Insurance for Mortgage Protection
Along with general family protection, one of the most common reasons for taking out life insurance is to protect a mortgage loan. This type of cover would payout a lump-sum amount to repay the loan upon death.
Why is this type of cover important?
Taking out life insurance for mortgage protection purposes isn’t right for everyone but if you contribute significantly to the monthly mortgage repayments and have a partner or family to protect it is an important policy to consider.
An important question to ask is what would happen to your home if you were to pass away? If life insurance is not in place and the mortgage payments couldn’t be met in your absence then the mortgage lender would look to repossess your home in order to recuperate the loan amount outstanding.
This may not be a problem if you are single with no family but if you have others who rely on your income and would be unable to meet the repayments in your absence then the need for life insurance clearly arises. This is why mortgage life cover is particularly popular with couples taking out a joint mortgage loan together.
How does the plan work?
Mortgage life insurance is designed to payout a lump-sum amount that is sufficient enough to repay your loan should you die within the policy term, thus leaving the house debt free for your partner/family. There are two types of life insurance available and which type is right for you will usually depend on what type of mortgage you have.
If you have a repayment mortgage loan (where both debt and interest are paid each month) then a decreasing term life insurance plan is usually most appropriate. With this policy the level of cover would decline over the life of your mortgage to broadly mirror the amount outstanding on your loan.
If you have an interest-only mortgage (where only interest is being paid each month) then a level term life insurance plan is usually most appropriate. With this policy the level of cover remains fixed over the life of your mortgage to cover a fixed amount of debt outstanding.
Drewberry Mortgage Insurance are one intermediary who provide a range of online guides detailing exactly how each type of plan works and what factors are important to consider when setting up cover.
What are the key options to consider?
The most basic options are the amount of cover you would like and how long you would like the policy to run. For strict mortgage protection purposes it usually makes sense to set the amount of cover equal to the amount of debt you have outstanding on the loan and the term length equal to the amount of time your mortgage has left to run.
A very important option to consider is whether to include critical illness cover on your plan. Including this option means that your life insurance policy could also payout if you were to suffer a serious illness or injury, such as a heart attack or cancer. Thus, if you were to suffer a critical illness you could repay the loan and focus on your recovery without the worry of having to meet mortgage repayments each month.
Published: 06/05/2011
The information in this article was correct at the time of publication and contains time sensitive data and links, it may not be accurate at the time of reading.