What is Mortgage Life Insurance?
With Mortgage Life Insurance, the amount you're covered for reduces over a set period of time. It's also known as decreasing term life insurance, and is most commonly used to support a repayment mortgage. The cover is intended to decrease in-line with your debts, with the lump-sum payout at death providing a means to pay-off any outstanding balance on your mortgage.
As the level of cover decreases over time, this life insurance is generally cheaper than level-term insurance, which provides a fixed amount of cover for the term.
If, like most, you share the financial responsibility of mortgage repayments, a joint policy can sometimes be a cheaper way of getting this cover. Like a single policy, this type of policy will only pay-out once, but as it's jointly owned, the premiums costs are shared.
Mortgage life insurance provides a way to protect your loved ones after your death from the financial burden of repaying a mortgage without your income.
You pay a monthly premium to an insurer in return for the assurance that they will pay out an agreed amount if you die within a set period of time. You choose the sum-assured, the rate at which you want this to decrease, and how long you'd like to be covered for. This tends to works alongside a policyholder's repayment scheme, with cover stopping once their mortgage has been paid off.
Monthly premium payments must be upheld to ensure the policy remains valid and like all term policies, if you do not die within the period, great news - but your policy will then expire.
Critical illness cover can also be added to most decreasing term policies, providing additional protection for you and your family.
Decreasing term Life Insurance is a sensible way of planning ahead for the future if you contribute to a mortgage repayment scheme. The payout can be used to pay off any outstanding debt on your mortgage so that your family would not be left with the financial responsibility of meeting these payments by themselves.
Life Insurance premiums will vary depending on the amount and duration of cover you've chosen. Your age, health, lifestyle and whether or not you smoke will also play a part.
When calculating the price of your life insurance quote, insurers will weigh up how likely it is they will need to pay out, in line with how much they will have to pay your family. As a general rule, the longer the period of cover and the larger the payout, the more expensive the premium.
As the assured sum gets smaller over time, decreasing-term life insurance is generally cheaper than level-term premiums. But whatever policy you choose, it is important to ensure that your monthly premium is affordable in the long term - failure to pay your premiums will invalidate your cover. Cancelling and taking out a new policy at a later date could mean that your premiums will be considerably higher due to your difference in age.
The cost of life insurance can also vary depending on if you choose a fixed or reviewable premium. Fixed premiums stay the same price throughout the policy term, whereas reviewable premiums can, with your approval, change at 5-yearly intervals. Fixed premiums offer the security that premiums will not change and so are usually more expensive than reviewable premiums to begin with.
This cover is often used to work alongside a repayment mortgage, which is why it's useful to look at your repayment scheme to work out how much cover you'll need in the future. Most policyholders time their cover to end once their mortgage has been paid in full, however some prefer to extend cover beyond this to provide a lump-sum for their loved ones. If the latter is your priority, a level term insurance policy may be of more value to you. Learn more about level-term life insurance.
How long you're covered for is decided by you, but for obvious reasons, most insurers will set a limit to the age they'll cover you until - usually around 77-80 years of age. This can vary between providers and any extras, such as critical illness cover, that you've included too.
The longer the term, the more expensive premiums will be, so working out when you'll have fewer financial responsibilities can be a simple way of trimming a few years - and pounds - off your premium.
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If any personal issues, such as health conditions, family arrangements or the size of your estate, mean that your financial situation is complex, you may benefit from personalised financial advice.
As independent financial advisers based in South Wales, we can provide guidance in these areas to help you effectively manage your finances and find the life insurance policy that will give you the security you need.
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