What is mortgage term life insurance?
With mortgage term life insurance, the amount you’re covered for (known as the ‘sum assured’) decreases over time, usually in line with your mortgage repayments. For this reason, this type of cover is often referred to as ‘decreasing term life insurance’.
This type of policy is designed to pay off a repayment mortgage in the event of the policy holder’s death. For interest only mortgages, a level term policy may be more suitable.
Because the cover amount reduces over time, decreasing term insurance is usually cheaper than level term (where the sum assured stays the same or ‘level’ throughout the term).
Like all term insurance, it will only pay out if the policy holder were to die within the term of the policy.
What is it for?
Mortgage life insurance protects your family from the financial burden of paying off the mortgage should the policy holder die.
You can choose the rate at which your cover decreases. In most cases, this will be at the same rate at which you’re paying off the mortgage.
You also choose the term (the number of years your policy will last). For most people, this will be the same as their mortgage term so that the cover finishes when the mortgage has been fully re-paid.
Whilst decreasing term cover can help protect your family from the cost of paying the mortgage if you were to die, it may not provide any additional money for your family to help cover other expenses.
This might include:
- A funeral for the policy holder
- Childcare costs
- Other livings costs
- Other outstanding debts
If you want to cover any of the above, as well as your mortgage, a level term policy may be more suitable.
“The sum assured decreases over time, in line with your mortgage payments. It’s usually cheaper than level term cover but is only designed to cover your mortgage.”
How does it work?
You pay a monthly premium to your chosen insurer. Although the pay-out will reduce over time alongside your mortgage repayments, your premium will stay the same throughout the term of your policy.
If you pass away during your policy term, your insurer will pay out a lump sum of money to your beneficiaries (i.e. your family).
The amount of money paid out will depend on:
- The amount of cover in place at the start of the policy (sum assured)
- How far into the term the policy holder dies
- The rate at which the cover decreases
Joint mortgage term life insurance
When protecting a repayment mortgage with decreasing term cover, it’s common to take out a joint policy that protects both you and your partner.
Joint policies allow two lives to be insured together e.g. a husband and wife. The main differences between joint policies and single policies are that they:
- Cover two people under the same policy
- Usually only pay out on the first death
- Can be cheaper than buying two single policies
If the sole purpose of your life cover is to pay off the mortgage in the event of either partner’s death, joint mortgage life insurance could be the cheapest option.
If you wanted your cover to help pay for other costs such as childcare, or pay for other outstanding debts, a level term policy may be more suitable.
Do I need it?
The aim of decreasing term cover is to protect your family from having to pay mortgage repayments they can’t afford without you.
Having this security can help your loved ones cope both financially and emotionally at a very stressful and difficult time.
Despite the importance of having cover in place, you don’t need life insurance in order to take out a mortgage.
“If you have people relying on you, some form of life insurance will help to give you and them the peace of mind they need, knowing that in the event of your death they’ll be protected financially If you just want to cover the cost of your mortgage, decreasing term cover could be the cheapest option.”
How much does it cost?
The price of mortgage life insurance will depend largely on the amount you’re covered for (sum assured), the length (term) of your policy and your age.
Your premiums will also be higher if you’ve had a history of medical conditions, have a hazardous occupation or take part in some extreme sports.
It’s very common for mortgage advisors, brokers and banks to offer their own life insurance products or recommend policies from particular insurers. At no point are you tied to using them for your insurance. Comparing policies and prices from multiple insurers can help outline all your options.
How much cover do I need?
When calculating your decreasing term cover, it can be useful to know:
- If you’re unsure how much of your mortgage is left to pay you can contact your mortgage lender.
Early repayment charges
- It’s common for mortgage lenders to charge you for exiting your mortgage agreement early.
- The charge amount usually depends on how long you agreed to be tied to your mortgage for. This is commonly between 2 and 5 years but can be as much as 10 years.
- Again, if you’re unsure what the early repayment charge is, contact your mortgage lender.
Adding together the remaining mortgage amount and the early repayment charge at the time of purchasing the policy will ensure your family could pay off the mortgage in full in the event of your death.
If you wanted to reduce the cost of your mortgage life insurance premiums, you could choose a cover amount that would pay off the mortgage in part, or alternatively choose a smaller, level term policy.
If you wanted to cover your mortgage and also leave additional money for your family, a level term policy for the full mortgage amount, plus any additional money you wanted to leave could be more suitable.
Having a decreasing term policy AND a level term policy could be more expensive than taking out a level term policy for the full amount.