How does mortgage life insurance work?
There are two different types of life insurance you can take out to cover your mortgage repayments; level term life insurance and decreasing term life insurance.
Decreasing term life insurance - with a decreasing term life insurance policy, the amount that you’re covered for reduces in line with your mortgage repayments, but your monthly premium remains the same. This type of policy is designed for repayment mortgages as it ensures that your loved ones will be left with enough money to cover the remaining mortgage debt when you pass away. Decreasing term life insurance is the most common policy and typically costs less.
Level term life insurance - level term life insurance pays out a fixed amount if you die within a predetermined time. For example, if you were to take out £250,000 life cover over 25 years and you pass away within the 25 year policy term, your loved ones would receive the full £250,000. If you have an interest-only mortgage, level term life insurance might be the best option for you because the lump sum could be used to pay off the capital rather than just the repayments.
How much cover do I need?
The amount of mortgage life insurance you need will depend on your personal circumstances but you need to make sure that your policy covers the amount left on your mortgage. Because the policy will be a decreasing term policy that reduces in line with your mortgage, make sure you have enough cover to pay off your mortgage from the start and align the policy to reduce in value at the same rate as your mortgage repayments.
How much does a mortgage life insurance policy cost?
The cost of your mortgage life insurance policy will depend on a variety of circumstances, including how old you are, your health and past medical history, how much you still owe on your mortgage, how much you earn and what level of cover you want.
Do I need life insurance to get a mortgage?
Whilst it isn’t a legal requirement, most mortgage lenders will require you to have a policy in place as a condition of the mortgage offer. Also, you need to bear in mind that if you were to die with unpaid mortgage debt, the person that inherits your property is responsible for paying it off. Most people take out mortgage life insurance so that their loved ones don’t have to struggle financially when they pass away. You might not need to take out mortgage life insurance if:
You have no dependents - if you don’t have a partner or children that rely on your income, you might not need a life insurance policy. #
You already have life insurance - your policy might not specifically state that it is ‘mortgage insurance', but if you have a level term or decreasing term policy already, your loved ones will receive a payout in the event of your death which can be used towards the cost of your mortgage debt.
Can I have my mortgage life insurance policy written in trust?
Yes, you can put your mortgage life insurance policy in trust. This means that the payout your family receives will be protected from inheritance tax. If the policy isn’t in trust and you were to die during the policy term, the money forms part of your estate and your dependants would need to pay inheritance tax before they receive the payout. However, if the policy is in trust, the payout is protected from inheritance tax and goes directly to your loved ones.
What’s the difference between life insurance and mortgage life insurance?
Life insurance comes in many forms and the payout your loved ones receive can be used in any way they wish. Mortgage life insurance is designed specifically to cover your remaining mortgage debt after you pass away.
Compare decreasing term life insurance
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Beagle Street offers an early payout for terminal illness and all premiums are fixed and will not change.
All policyholders get free access to LV= Doctor Services and terminal illness cover is included at no extra cost.
All Royal London life insurance policies include terminal illness cover at no additional cost.