Are you considering taking out mortgage protection insurance, but feeling confused about your options?
As the name implies, mortgage protection insurance is designed to pay off your outstanding repayment mortgage in the event of your death. This means that, in the event of a claim, your mortgage could be paid off in its entirety ? ensuring that your loved ones won?t have to worry about losing their home, in addition to losing you.
However, there are several important differences between mortgage protection insurance and other types of life insurance. So, to help you make an informed decision, we?ve put together this simple guide.
Here, we?ll explain exactly what mortgage protection insurance is, what it covers and what it does not cover ? so you can decide whether this is the best type of life insurance for you and your family.
Put simply, a mortgage protection insurance policy is designed to pay off your mortgage in the event of your death. If you have a repayment mortgage, your outstanding mortgage decreases over time. Similarly, with a mortgage protection insurance policy, the amount of cover the policy provides decreases over time, roughly in line with your repayment mortgage ('If you have an interest only mortgage where the outstanding capital balance remains the same throughout the term of the mortgage, a level term life insurance policy may be more suitable')
For example, if you take out a mortgage protection insurance policy and die shortly afterwards with £150,000 still left to pay on your mortgage, this is the amount your insurer will pay out. If, however, you died many years later with only £15,000 left to pay, your insurer would only pay out this amount.
For this reason, mortgage protection insurance is also known as "decreasing term life insurance" and, because the cover reduces, this type of policy tends to be cheaper than level term insurance.
It is important to note that, although the size of the payout decreases over time, the price of your premium stays the same throughout the length of your policy term.
You can take out a mortgage protection policy to cover either one or two lives. When it covers two lives (known as Joint Life), the cover is still only designed to pay out on a single claim over the term of the policy so will pay out on the death of either of the people covered, whoever dies first.
When you take out your policy, you choose the number of years you wish the cover to be in force (term). With mortgage protection insurance, this should be the same as your remaining mortgage term. You will need to pay your premiums every month of your chosen term, or the policy and the protection it provides will cease.
There is no cash in value at any time and, if no claim is made before the end of the term, the policy will cease, and nothing will be paid out. If, at any time during the term of the policy, a claim is made, then the policy will cease following the payment of the claim.
A mortgage protection insurance policy pays out the amount of money required to pay off your mortgage. For many, the peace of mind this provides is all the security they need. You will need to make sure that the cover level selected when you take out your policy is enough to cover the outstanding balance on your repayment mortgage, and match the length of your policy to your remaining mortgage term.
If you have a mortgage protection policy in place and you make a change to your mortgage, such as extending your mortgage term, or increasing the amount borrowed, you should check your policy to make sure it continues to give the cover your need.
It is important to note that this type of insurance will not leave your family with any extra money to cover additional costs, such as day-to-day living expenses, bills, childcare, education and so on.
If you worry that your family might struggle to stay afloat financially in the event of your death, even once the house has been paid for, then you may wish to consider taking out a life insurance policy that will leave your dependents with a financial nest egg as well.
In the above circumstances, level term life insurance could be a good option. However, it is more expensive than mortgage protection insurance as the amount of cover remains the same throughout the policy term.
In their simplest form, mortgage protection insurance policies do not pay out in the event of a critical illness, which could leave you struggling financially should you suffer one. However, it is possible to add critical illness cover to your policy at the time of purchase.
Finally, as with all life insurance policies, it is vital to read the key features of the policy you choose so that you are aware of any possible limitations in the cover selected. To learn more, visit our What is Life Insurance? page.
There are many reasons a person might decide to take out a mortgage protection insurance policy. However, the most common include:
If you think mortgage protection insurance might be right for you, the next step is finding the right policy.
That?s where Compare Cover comes in. Our goal is to give you the tools to find the right policy for you and your family. Our comprehensive, easy to use online service gives you the power to compare life insurance policies from a range of leading insurers in just a few minutes.
If you are replacing an existing policy, please ensure you do not cancel your current arrangements until your new policy is in force.
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