Buying a home is a stressful time in life. While it’s a great feeling to own your own space, the process of moving, selling your old home, and applying for a mortgage loan can take its toll. Even once you’ve moved into your new home, there is then the matter of protecting it.
Mortgage life insurance is often overlooked as a way to protect your mortgage payments from loss. But it’s more than just a legal document; it’s a must-have tool to protect your family’s financial future.
It doesn’t just prevent your family from losing their house, it can also cover a wide range of finances. In this article, we’ll look at how mortgage life insurance works and why you should consider it…
What is mortgage life insurance?
Mortgage life insurance is a type of policy plan designed to pay off your mortgage if you die before it’s repaid. Like most types of life insurance, it pays out a lump sum to your loved ones. They can then use this money to pay off the remaining mortgage balance for their home.
But even if it’s already been paid off, the money can help your loved ones with household bills, funeral expenses and other costs. Many homeowners opt for this type of protection, as it provides peace of mind for their loved ones.
How it works
There are 3 steps to taking out a mortgage life insurance policy:
- Choose the amount of cover you need – In this case, the amount owed on your mortgage. You may also want to consider cover after your mortgage has been paid off.
- Choose the policy term – This is how long you want the policy to last. Term life policies only last for a set period of time (ideal for covering a mortgage). Whole life insurance protects you permanently (ideal for covering both a mortgage and future expenses).
- Choose how you pay your premiums – You can normally pay your premiums annually, quarterly, or monthly. This depends on how much money you want to pay upfront or spread out over the year.
3 main types of cover can be used to protect a mortgage:
- Decreasing term life insurance – This type of policy is most associated with mortgage protection. The payout value of the policy decreases over time as you make repayments on the outstanding balance.
- Level term life insurance – Pays out a cash lump sum if you die within the policy term. Both the payout value and premium cost remain fixed during the policy.
- Whole life insurance – Your family receives a cash lump sum regardless of when you die. During the policy, both your premiums and payout value remain fixed. One downside is that this type of cover can be expensive.
Should I buy term or permanent coverage?
One of the key questions people face when buying life insurance is whether they should buy a term or a whole policy. The main considerations between the two are cost and the length of the policy term.
Whole life insurance provides permanent cover, so you won’t have to worry about the policy expiring, or your rates being increased. It provides peace of mind for your loved ones going into the future. Premiums for whole policies are typically more expensive than term life insurance, as the cover is permanent.
Term life policies only last for a certain amount of time, for example, 25 years. This makes it ideal for covering a mortgage, as you can select the policy term to match the length of your mortgage loan.
As one of the cheapest types of life insurance, it’s great if you’re looking for cover on a budget. However, if you survive the policy term, you won’t be able to claim any money back on the premiums paid.
Ultimately, it depends on your circumstances. If you’re only looking to cover a mortgage, decreasing term cover may be the way forward. But if you want to cover all bases, you may be better suited to whole life insurance.
How much cover should you buy?
From one perspective, your cover amount should reflect the outstanding balance on your mortgage. However, life insurance can cover more than just a mortgage. When you die, the money paid to your family can help them cover finances, such as:
- Living costs
- Household bills
- Loan repayments
- Paying off outstanding debts
- Your children’s school fees
- Funeral expenses
If you’re purchasing cover, such as decreasing term life insurance, it is intended to cover your mortgage. So if you’re looking for cover after you’ve paid off your mortgage, term or whole life cover may be a better option.
Once you decide to buy mortgage life insurance, the next part is finding the right provider. There are thousands of comparison sites across the web that can help you get a quote in minutes. Or if you’re looking to save money, why not use a discount broker?
