How can I Protect my Mortgage?

When you take out a mortgage, many people will take out life cover alongside the mortgage to cover the mortgage amount, should they no longer be around to cover their mortgage repayments. Some mortgage lenders even insist that you take out life cover as they want to make sure that should anything happen to you and you pass away, the lender is able to reclaim the money they have loaned you. The mortgage lender could in theory reclaim your home, however this is not always straight forward and can cause various problems for the lender which they do not want, so insist that you take out life cover so that in the event of your death they will receive a lump sum pay-out to clear your mortgage.

Interest Only

If you have an interest only mortgage then a level term plan would be ideally suited to you. As the capital does not reduce over the term of your mortgage neither does the life insurance. This means that the sum assured that you take out when you start your mortgage will be exactly the same as on the last day. 

A level term plan can also be used effectively if you have a repayment mortgage and in the event of your death you want to clear your mortgage and leave some extra money for your loved ones. If you are fortunate enough to be mortgage free, you can still apply for a policy and the level term life plan can still pay out a lump sum to your family in the event of your death. A level term plan is great as you know that no matter what happens, the sum assured will always be the amount you agreed at the start of the plan.

A level term plan is also a favourable 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 any debts or loans you may have.

If you have a mortgage most people will take out a life cover, sum assured based on covering their mortgage amount.  What people often do not consider is any other bills or repayments that may need covering (council tax, water rates, gas and electricity bills, etc) will all still need paying. 

Repayment Mortgage

A decreasing mortgage insurance plan will decrease throughout the term of your plan. The repayment mortgage plan is normally suited to people with repayment mortgages. The life insurance plan is the cheaper plan when compared to level term mortgage insurance. This is because the sum assured reduces throughout the term of the plan.

The premium for a decreasing mortgage plan is cheaper from the outset however over time your sum assured will decrease but your premium payment will remain the same, for example, if you take out a policy for £200,000 over a term of 20 years, your plan will pay out £200,000 if you were to die in the first year of having your policy. Ten years down the road your still paying the same premium however your cover would now only pay out approximately £100,000. 

In the final year of your plan, you will still be paying the same premium amount as you were in year 1 and year 10, however your sum assured would now be closer to £10,000.  This will usually be in line with how much is remaining on your mortgage in the final year.

The decreasing mortgage plan will only work if you have a capital and repayment mortgage and the interest rate on your mortgage is less than the percentage rate on your insurance.

If you have already decided that life insurance is the right choice for you, then you have realised how important it is to be able to provide for your loved ones in the event of your death. The amount you decide you need for your sum assured can often prove more difficult to decide.  Many people will take out life cover to cover their mortgage so if they were to pass away their mortgage is paid off and their family can keep a roof over their heads. You can also consider looking to replace your income in the event of your death and opt to request cover in the form of a lump sum which can be several times your salary or even select to have a monthly pay-out provided to your family to help cover their bills, after the mortgage has been cleared.

Every one of us is different and therefore everyone’s life insurance needs and requirements are going to be different. For example, Linda is single and has three young children and has just taken out a mortgage, she is probably going to need more insurance than Michael who is 50, all his children have left home and he only has 3 years left to pay on his mortgage. Everyone’s requirements for insurance will vary.

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