Buying a house is probably the biggest financial decision you’ll ever make. It’s also more than likely you’ll need to take out a mortgage loan to cover the cost, which typically takes years to pay off.
If you die unexpectedly, your family might struggle to pay off your mortgage, meaning they could lose their home. In this case, buying mortgage life insurance is a smart way to protect your loved ones.
With a little research, you can get a clear picture of what type of policy suits your needs and budget. In this article, we’ll take a look at how mortgage life insurance works, and whether or not you are required to buy cover by your lender. So how does it work?
What is mortgage life insurance?
Life insurance is an investment that pays out in case of death or disability. It’s designed to provide income to your beneficiaries if you pass away unexpectedly. So how does it differ when it comes to protecting a mortgage?
Sadly, when you die, your mortgage doesn’t disappear, instead your provider will expect your family to cover payments. If they are unable to fulfill these payments, your family will be forced to sell the home.
With a mortgage life policy, your family receives a lump sum payment to cover the remaining balance on your home’s mortgage when you die.
Just like any type of insurance, once you take out a policy, you are required to pay monthly premiums to your insurer. These premiums can vary depending on the amount of coverage you choose and the length of time you want the policy to last.
Is mortgage life insurance mandatory?
There is no legal obligation for you to buy life insurance cover for your mortgage, however most lenders will recommend that you do. Some lenders may also consider it as a precondition for agreeing to the loan.
Of course, if your family has plenty of savings or your spouse has a high income, they may not need cover. Yet it makes perfect sense to have cover in place should the worst happen.
Although you may want cover for your mortgage, a life insurance policy can cover additional finances, such as:
- Living costs
- Household bills
- Childcare support
- Funeral expenses
- Credit card debt
Which type of cover should I choose?
There are 3 types of life insurance cover used to cover a mortgage:
- Decreasing term life insurance – Predominantly designed to cover a mortgage. The payout value of the policy decreases over time as you make repayments on the outstanding balance of your mortgage loan. Term life policies are ideal for mortgage cover, as they last for a set period of years that can be set up alongside your mortgage.
- Level term life insurance – The standard type of term life insurance. With level term cover, both the payout value and cost of your monthly premiums are fixed throughout the policy. Premiums for term life policies are typically cheaper than whole life. This is largely due to the fact that it has a temporary policy term.
- Whole life insurance – Whole life insurance is a permanent form of cover. As such, the policy pays out regardless of when you may die. Throughout the policy, both the payout value and cost of your premiums remain fixed. While whole life cover can be expensive, it provides peace of mind for the future ahead.
Critical illness cover is another option for protecting a mortgage. Although it doesn’t cover you from death, it will pay out a lump sum if you are diagnosed with a critical illness or injury. This payout covers the income lost from being unable to work, which can be used to cover mortgage repayments.
How much does mortgage life insurance cost?
There are several factors that determine how much your life insurance policy costs. This can include:
- Your age – The cost of life insurance tends to increase as you get older. If you want cheaper premiums, it’s best to take out cover at an early stage.
- Health – Having health conditions can affect the price of your policy. For example, if you have a heart condition, this could result in higher premiums.
- Lifestyle – Your lifestyle choices can also influence the cost of your policy. For instance, smoking increases the risk of heart disease, which means your premium will likely rise.
- The size of your mortgage – The larger the mortgage, the more expensive the policy.
- The type cover – if you’re looking for a cheap policy, then term cover might be right for you. However, if you’re looking for something long-term, then whole life cover is usually the way to go.
Where can I get mortgage life insurance?
You can purchase mortgage life insurance through a number of different providers. However, if you’re looking for an affordable policy or advice, you may want to consider using a discount advisory broker, such as Cavendish Online. They can help you find the right policy for you and your family, taking your circumstances into account.