Life Insurance vs. Mortgage Life Insurance
There are a variety of particular reasons why you might want to purchase a life insurance policy, whether it’s to pay off a particular debt like a mortgage or to simply provide your family with the financial stability they’d struggle to regain if you passed away.
We’ll take a look at the options available to you, whatever you need your policy for.
In this guide:
What is life insurance?
Put simply, a life insurance policy will pay out a sum of money to your dependents in the event of your death.
This can take various forms, with different levels and lengths of cover available and different forms of pay-out depending on your particular requirements.
If you’re taking out a life insurance policy to ensure your family’s ability to keep up with day-to-day expenses that you are currently responsible for then you might want to opt for whole of life cover or level term insurance.
Whole of life cover, or life assurance, will guarantee your dependents a pay out in the event of your death, whenever this may be.
Level term insurance will cover you for a set period, generally around 25 years, and will pay out a fixed sum on your death if you die during the policy term. Once the term is up you will no longer be protected.
Level term insurance tends to be cheaper than whole of life cover given the reduced risk of a claim being made.
If your policy is there in order to make sure that your children have enough money to get by when you are no longer around to provide it, you should think about writing your life insurance in trust.
This means that when you pass away, the value of the pay-out of your policy will go directly into a trust to be looked after by a trustee until the intended beneficiary (or beneficiaries) reach a certain age.
This has the added benefit of sidestepping inheritance tax and removes the need for potentially lengthy probate procedures.
What is mortgage life insurance?
Given that in many households, mortgage repayments are the biggest regular expense, many people purchase life insurance policies in order to help the remaining family members maintain them.
The best option available for those opening up a life insurance policy is to purchase decreasing term insurance.
This kind of policy is designed specifically to help pay off debts with decreasing values such as repayment mortgages.
They work by having the pay-out decrease throughout the policy term according to the value of the remaining mortgage payments to be made.
So if you have a decreasing term life insurance policy open and you die during its third year when you have £100,000 left to pay off, then it will pay out that amount. If, however, you live longer and then pass away during the last year of the policy term when you only have £1,500 left to pay off, then the insurer will pay out £1,500.
Decreasing term policies are cheaper than level term policies because of the steadily decreasing pay-out.
There are various things you can add on to your policy, at extra cost, in order to tailor it more specifically to your needs.
For example, if you want mortgage life insurance like a decreasing term policy, you might also want to add mortgage payment protection insurance (MPPI).
This kind of cover will offer you a pay-out to help you keep up with mortgage repayments if you are still alive but become either seriously ill or injured to the point where you can no longer work and earn a living.
Critical illness cover works similarly, though is not tied to mortgage repayments. If you’ve purchased critical illness cover and contract one of the specified serious ailments, then you’ll receive a pay out to help accommodate for the lack of income that follows your inability to work.
Generally if you have a life insurance policy with critical illness cover, you’ll only receive one pay-out. So if your critical illness policy pays out, you’ll no longer receive anything on your death.
Compare Mortgage and Life Insurance Policies
Whether you’re after whole of life cover written in trust to help your kids in the future or a decreasing term policy to help your family keep up with mortgage repayments, you can compare the cost of different policies online.
By using our life insurance comparison service, you’ll have your pick of the best quotes available so you can rest easy knowing that you’ve got a good level of cover at an even better price.