A Guide to Mortgage Life Insurance

A guide to mortgage protection insurance

Published 10 May 2018  |  Last updated 19 May 2020

With so many different options out there, we understand that choosing the right life insurance policy for you and your situation can be a little confusing. Each policy can offer different benefits and restrictions, so it is important that you have all the information you need before you make a decision. 

We have outlined what first-time buyers need to know in our First-time home buyers guide, so this is a good time to look at mortgage protection insurance policies and what they actually offer.

What is mortgage protection life insurance?

Mortgage protection insurance (also known as decreasing term life insurance) is designed to pay off a repayment mortgage should you die before you've paid it off.

This means that your dependants or next of kin will not have to worry about the monthly mortgage payments, as your life insurance policy should repay the remaining mortgage balance.

It's important you take out a policy that matches your outstanding mortgage balance and mortgage term. Your premiums will remain the same throughout your selected policy term. 

The amount of life cover payable decreases broadly in line with the outstanding balance on your repayment mortgage, assuming a fixed interest rate.

This is usually a cheaper option compared to level term life insurance. 

What are the benefits?

There are a number of reasons why some people choose to opt for a mortgage protection insurance policy.

Firstly, it can be suitable for families who have just bought their first home, with a repayment mortgage, and have children or other dependants. When looking at, say, 35 years of mortgage repayments ahead of them with a sizeable mortgage balance that they need to pay, this type of policy could be invaluable. 

As the monthly premium takes account of the reducing level of cover that will be payable over the policy term, similar to a repayment mortgage, it is usually cheaper than alternative policies. 

This type of policy may allow dependants to stay in the home in the event of death, as the outstanding mortgage balance may be paid off. Without protection, they may struggle to keep up with the mortgage payments and be forced to sell the family home. 

What are the restrictions?

While there are many benefits of a mortgage protection insurance policy, it may not fully provide all the life cover you need.

While this type of policy covers your outstanding mortgage balance, it does not provide any other financial support for other costs that your family may incur after your death. These could include funeral costs, childcare expenses, and/or other loans. 

Although the mortgage may be paid off, this doesn't mean that they will be able to keep up with the other associated costs of running a home.

Another name for a mortgage protection insurance policy is 'decreasing term life insurance', which refers to the fact that over time, the amount of money the policy will pay out decreases, just as your outstanding mortgage balance decreases.

This is why some people also consider more comprehensive policies that offer more cover. 

Considering level term life insurance

Of course, a mortgage protection insurance policy may be the perfect option for you, but if you are looking for something with more cover, a level term life insurance policy may be worth considering.  

This type of policy allows you to set a fixed amount that will be paid out should you die within the specified term. The amount of cover remains the same for the term of the policy as do the premiums. 

This means that the money paid out can be used to cover an outstanding mortgage balance as well as other costs your family may be faced with, such as funeral costs or regular financial commitments such as school or university fees. 

A level term life insurance policy could offer a little more flexibility to add more cover to suit your family's needs. 

Alternatively, you could take out both policies based on your needs. A mortgage protection insurance policy for your repayment mortgage and a level term life insurance for those additional family costs.

Everyone's needs and situations are different, so you should take time to research the different policies available to find the one that suits you best. You should also think about how long you want your cover to last. For example, if you are protecting your repayment mortgage, ensure your cover lasts for the whole of your mortgage term.

Whether you choose mortgage protection insurance, level term life insurance or any other type of policy, you can compare life insurance at Compare Cover to help you secure the right deal for you and your family.

If you're not sure how much cover you will need, you can use our life insurance calculator to get a better idea of the type of cover that may be best for you.


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