Mortgages and Life Insurance
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Last updated: 02/02/2023 | Estimated Reading Time: 4 minutes
Making sure that their family is still able to keep up with mortgage repayments is a major reason why many people take out life insurance policies in the first place.
For most households, mortgage repayments are the largest regular expense and so, particularly if the main earner in the family is the one who passes away, a good life insurance policy can be an essential lifeline.
One option you might want to think about if you’re taking out life insurance to pay off a mortgage is a decreasing term policy. When you take out this kind of cover, the pay-out that your family receives in the event of your death decreases steadily with the value of your remaining mortgage repayments.
So it might be that if you pass away in the third year of your policy’s term, your family could receive £95,000, but if you pass away during its final year when the remaining value of your outstanding mortgage payments is only £5,000, then that will be the value of the pay-out.
As you’d expect, with such policies, the premiums will be lower than they would be otherwise with what is known as level term insurance.
However, should the term finish and you're still alive, you will no longer be protected in the event of your death and you will most likely find that because of your increased age, any policy you want to take out after this will be more expensive.
With level term life insurance, a term is set at the opening of the policy, usually of around 25 years. The pay-out received when a claim is made stays the same throughout the policy term, whether you die in the first year or the last year, or anywhere in between.
However, should the term finish and you still be alive, you will no longer be protected in the event of your death and you will most likely find that because of your increased age, any policy you want to take out after this will be more expensive.
Whole of life insurance, or life assurance, refers to a type of policy with no set term that will simply guarantee you a pay-out whenever you die.
While whole of life policies come with the added peace of mind that comes with an assured pay-out, they are also rather more expensive than both level and decreasing term mortgage life insurance.
Mortgage Payment Protection Insurance (MPPI) is available either as a standalone product or as an add-on to a full life insurance policy. With this kind of cover, you’ll receive a pay-out in the form of regular instalments aimed at helping you keep up with mortgage repayments in the event that you become seriously injured or ill to the point where you can no longer work to earn a living.
Other close equivalents to MPPI are Payment Protection Insurance, designed for any debts, and Income Protection Insurance, broader still, geared towards simply providing you with an income when you can’t do so yourself to keep up with either debts or general household expenses.
It is worth bearing in mind that not all providers offer MPPI either as a standalone product or as part of an add-on to a policy.
When you take out a life insurance policy to pay off your mortgage, you’ll also have the option of adding on critical or terminal illness cover.
These both function somewhat similarly to MPPI paying out a tax-free lump sum if you contract one of the specified serious illnesses covered by the policy.
Bear in mind though that if you have critical illness cover added to a life insurance policy, you’ll only receive one pay-out. So if you contract a serious illness, you’ll get a pay-out but will not receive anything further when you die. It is also worth noting that adding critical illness cover to your policy will come at an additional cost.
To get the best deals on your mortgage life insurance policy, make sure you compare life insurance quotes online with Money Expert. We’ll show you a list of the policies that suit your requirements so all you need to do is pick the right one for you and start saving right away, safe in the knowledge that, should the worst happen, your family will be financially sound.