Though it’s never nice to think about it, what would happen to your home’s mortgage if you were to suddenly die? How would your family be able to pay off the remaining balance without your income? That’s where mortgage life insurance can help to reduce this financial burden, providing your loved ones with peace of mind.
What is mortgage life insurance?
Life insurance can be bought to cover a variety of things such as people, cars, electronics and even the mortgage on your home. Mortgage life insurance usually refers to a specific type of term life policy called decreasing term life insurance.
Types of cover
There are two main types of term life insurance used to cover a mortgage – decreasing term & level term.
Decreasing term
This type of cover is designed specifically for covering large payments that your family would otherwise struggle to pay back on their own. The eventual payout decreases over time as you pay off the outstanding balance owed for your mortgage.
When you die the policy pays out to your family. This should provide them with enough money to cover most of – if not the entire amount owed on your mortgage. Besides a mortgage, it can be used to cover any debts or loans you don’t want to leave your family to pay off.
Level term
This is the standard type of term life insurance, popular amongst those who have an interest-only mortgage. Your premiums and pay-out amount are fixed throughout the policy term
As with any type of term life insurance, cover is only provided for a set amount of time (i.e 30 years). This is known as the policy term. You only trigger a payout, if you die during the policy term. If not, your cover will expire and you won’t receive any form of compensation.
Decreasing term is typically cheaper than level term. This is because the eventual pay-out amount will be lower than when you originally took out the policy. How much the policy pays out depends on the amount of cover you take out.
What are the alternatives to mortgage life insurance?
You don’t have to buy term life insurance to cover a mortgage. Several alternative types of cover can be used to protect your family’s home.
Whole life insurance
As the name suggests, this type of policy provides cover for the remainder of your life. When you die a lump sum is paid out to your family to support them during the difficult times ahead.
Unlike term life insurance, this type of life insurance pays out no matter when you die – so long as you keep paying your monthly premiums. Your family can use the payout to clear the outstanding mortgage balance.
Family income benefit
This type of protection works differently from a typical life insurance policy. Instead of paying out a one-time lump sum, your family receives monthly tax-free payments to replace the lost income.
You also get to choose the level of cover, the higher the amount, the more costly the premiums will be. Like term life insurance, a family income benefit typically lasts for a set period.
Critical illness cover
This type of cover can be added to a life insurance policy. It provides you and your family with financial support if you are diagnosed with a critical illness or injury.
It’s important that you check the terms and conditions of your cover as not all illnesses & injuries are covered.
What’s the cost of mortgage life insurance?
When applying for a life insurance quote, insurers will ask for some general information about yourself such as:
- Your age
- Health
- Occupation
- Your current mortgage balance
- Amount of cover you want
- Length of cover needed
The two defining factors that determine the cost of your policy are age & health. As you get older the risk of developing health conditions increases as the cost of your policy premiums.
Likewise, if you have any pre-existing medical conditions you could end up paying a lot more for cover.
If you’re looking to save money on cover, consider opting for joint life insurance. This is a popular choice with couples as it is often cheaper and easier to manage than two single policies.
Interesting related article: “What is a Mortgage?“