Mortgage Life Insurance

When buying a home there are many things that need to be taken into consideration; where to buy, how much is affordable, how many bedrooms are needed? Yet one of the most important things we often neglect but is crucial is how can we insure the home? How can I keep paying the mortgage if I am unable to work?

A lot of time and effort is put into buying a home. On average it now takes 8 and a half years to save for a deposit on the average first home priced at around £181,000 (1). No one wants to be facing an eviction if they become critically ill and were unable to work and keep up with the mortgage repayments or know that their loved ones may struggle or become homeless if you died unexpectedly and left your family with a shortfall in their income and are therefore unable to keep up with the mortgage repayments.

1. Yorkshire Building Society First Time Buyers Report, 2012

.What options do I have?

When you take out a mortgage, many people will take out life cover alongside their mortgage to cover their mortgage amount. Some mortgage lenders even insist that a life insurance policy should be taken out to cover the mortgage before they will accept you. This is because mortgage lenders want to ensure that should anything happen to you and you pass away, the money they have loaned you can be reclaimed.

If you have an interest only mortgage then a level term plan would be ideal for you as the capital does not reduce over the term of the mortgage and neither does the life insurance element. The sum assured you take out when you started the mortgage will still be the same on the last day. 

A level term plan can also be used very effectively for repayment mortgages if you want to clear the mortgage balance and leave some extra money for your loved ones. You do not necessarily have to have a mortgage for a level term life insurance plan; the plan can still pay out a lump sum to your family in the event of your death. A level term plan is ideal as you know no matter what happens, the sum assured will always be what you agreed.

A level term plan is also an extremely good way of protecting a personal loan or car finance. By being able to leave a specific amount when you die, the people left behind will be able to cover your debts or loans.

A popular way of protecting a mortgage is to take out a decreasing plan. The sum assured with a decreasing term plan will decrease throughout the term of the plan.  This is normally more suited to people that have repayment mortgages. 

The decreasing life insurance plan is the cheaper plan when compared to level term mortgage insurance. The premium is cheaper to begin with however over time the sum assured will decrease but the premium will remain the same.

  • If you take out a policy for £200,000 over 20 years, the plan will pay £200,000 if you die in year one.
  • 10 years later the premium will not have changed however the sum assured will now be worth £100,000. 
  • In the final year of the plan, you will still be paying the same premium amount as you have done in the first year; however your cover value would now be closer to £10,000. This would usually be in line with how much is owed in the final year of your mortgage.

This decreasing plan only works if you have a capital and repayment mortgage and the interest rate is less than the insurance percentage rate. 

If you have decided on taking out life cover then you have probably realised just how important it is to provide for your loved ones in the event of your death. The amount you require to enable you to do this can prove to be more difficult to decide. Many people take out life insurance to cover their mortgage so if they were to die their mortgage is paid off and their family can keep a roof over their heads. You can also look into replacing your income or providing a lump sum payment for a significant amount or even have a monthly pay-out to provide cover for bills out outgoings after the mortgage is cleared. There are various options available to you and Proadvice will be happy to help you to find a policy that suits your requirements.

No two people are the same and therefore everyone’s life insurance needs are going to be different. For example, a single mum with three young children, who has just taken out a mortgage, is probably going to require more insurance cover than a divorced male in his 50’s, where all of his children have left home and he only has three years of payments remaining on his mortgage.

Why do I need MPPI (Mortgage Protection Payment Insurance) cover?

One of the best days in the month is payday. We spend all month working out where our money is going to go. It is usually on all the important things such as the mortgage, bills and food shopping but also on all of the fun things we like to do, such as holidays, nights out and things for ourselves or the children but what happens if we are left without that all important payday?

Should you end up in the unfortunate position where you lose your job or become unable to work due to sickness or accident then the MPPI plan helps to cover your mortgage. The MPPI plan will normally pay out for 12 months. 

MPPI plans are usually sold in line with a mortgage. In the event that you are unable to work the loan would be protected by the MPPI plan. You can choose the deferment period of the plan, that suits you best and the sooner you would need the money the more you would have to pay on the plan.

The MPPI plan is restricted to the mortgage payment plus up to an extra 25% additional cover.

What other choices do I have in addition to MPPI?

Critical illness insurance is a long term insurance policy designed to pay out a lump sum to clear your mortgage on the diagnosis of certain life-threatening or debilitating, (but not fatal), conditions such as a heart attack, stroke, certain types or stages of cancer, multiple sclerosis and loss of limbs.

A critical illness cover plan can be used to protect you and your family as the plan will pay out a lump sum if you are diagnosed with a critical illness. The number of listed critical illness conditions varies from company to company with some providers covering 4 conditions and other providers covering up to 160 critical conditions.  You can use the money to pay off a mortgage should you be diagnosed with a critical illness. 

Like all critical illness cover, a mortgage critical illness plan will only pay out if you meet the insurers’ correct definition of a critical illness. Every insurance company is different so it is worth speaking to one of our Proadvice advisers to determine which plan will be suitable for you.

This Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against loss of income. For impartial information about insurance, please visit the website at www.moneymadeclear.org.uk.

Can I cover other debts, not just my mortgage?

Many people will take out life insurance or critical illness cover solely to protect their mortgage but what you may not realise is that you can in fact include other debts such as car loans and outstanding credit cards. To add a few thousand pounds to your mortgage plan to cover theses additional debts can sometimes cost as little as a pound a week.

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