Why protection matters
If you have dependents that rely on your income to cover bills such as the mortgage and other outgoings, it pays to think about how they would cope if you were no longer here.
Although none of us likes to think about dying, death is a possibility for any of us at any stage of our life, so it’s important to ensure your loved ones will be financially secure if you suddenly aren’t around to provide for them.
In return for monthly premiums, life insurance will pay out a lump sum when you die, offering peace of mind that your family won’t be left with money worries at what is already likely to be an upsetting time.
You can either take out a policy that will cover your mortgage alone, or you can buy cover which will provide your family with a lump sum that can pay off your home loan and leave them with money to spare for other debts and ongoing living expenses.
Here, we look at the differences between life insurance and mortgage life insurance to help you decide which kind of cover might be right for you.
What is life insurance?
Life insurance is designed to pay out a lump sum in the event that you die unexpectedly. Some policies enable beneficiaries to receive monthly payments instead of a lump sum.
One of the most common kinds of life insurance is called ‘term’ insurance. This type of policy runs for a set term, perhaps 20 or 25 years and, in return for fixed monthly premiums, will pay out if you die during this period.
If you don’t die during the policy’s term, you simply stop paying the premiums when the term ends, and the cover will lapse.
Another option is ‘whole of life’ cover. This sort of policy will cover you for your whole life rather than a set term and, as a result, premiums are much more expensive than they are for term insurance.
When buying life insurance, the first step is deciding how much cover you need. This is known as the ‘sum insured.’ Remember that the bigger the sum insured, the steeper your premiums will be, so you need to consider carefully how much you can afford to pay each month.
Mortgage life insurance
Mortgage life insurance is simply a form of life insurance where the pay-out will cover only your outstanding mortgage debt.
Rather than opting for level term insurance, where the pay-out doesn’t change over time, many people looking to cover repayment mortgages opt for what is known as decreasing term insurance.
This is when the sum insured gradually reduces over time as you pay down your mortgage, although monthly premiums remain the same.
This kind of policy is not suitable for people with interest-only mortgages, who only pay off the capital at the end of the mortgage term, as the capital debt does not reduce over time.
Anyone looking for a pay-out which is bigger than their outstanding mortgage when they die will want to opt for level cover instead, as the lump sum pay-out from this kind of policy will remain the same. Premiums for level term insurance are higher than those for decreasing cover because of this.
Another alternative is to opt for increasing term insurance. This kind of policy offers a lump sum which increases over time, usually by 5% or 10%, so that you can be certain any pay-out will keep pace with rising living costs. This type of life insurance can be expensive, so be prepared for relatively steep premiums.
With life insurance and mortgage life insurance, you can choose to add on extra cover. One of the most common additional policies is critical illness insurance. If you already have life cover in place, you can take out critical illness cover as a standalone policy.
As its name suggests, critical illness is designed to pay out if you suffer a serious illness. All policies cover certain core conditions, including heart attacks, strokes and cancer, as well as many other illnesses and conditions, although the exact coverage offered will vary from insurer to insurer.
If you choose to take out a combined critical illness and life insurance policy, the policy will only pay out once. So, for example, if you develop cancer, the policy will pay out at that point, and there will be no further payment if you die during the term.
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