When you take out a mortgage, it makes sense to take out life insurance that would pay off your home loan in the event of your death. There are different types of life insurance. The 2 most common ones are:
Level term assurance
This is the most basic type of life insurance. In return for relatively low monthly payments, the policy guarantees an agreed amount of life cover over a fixed term - often the mortgage period. It is commonly used to cover interest-only mortgages, where the capital owed remains constant throughout the mortgage term. The lump sum is paid out if death occurs before the policy ends.
Decreasing term assurance
With decreasing term assurance, instead of the life cover staying at the same level it reduces over the life of the policy and only pays out if death occurs before the policy ends. This type of cover is popular among those taking out repayment mortgages, as the sum assured reduces roughly in line with the amount of capital owed on the mortgage through time. So if death should occur before the period ends, the policy pays out a proportion of the sum originally assured, which should be enough to pay off the amount of capital still owed to the lender.
Guidance
1. Get the right type of policy
This sounds obvious, however, there are dozens of different types of life cover plans available. Known as 'Term Assurance' the most common form of life cover pays out should you pass away during a specific time period, however cover can be level, decreasing or even increasing to suit a mortgage. Cover can also be paid as an income or a lump sum, and a range of options will be offered including critical illness, waiver of premium, conversion, renewal and so forth.
2. Always consider single life policies
Traditionally joint life cover was far cheaper than taking one policy each. However, in recent years this has changed. Buying two single policies potentially provides double the cover, doesn't leave a surviving partner without cover later in life and often only costs a few percent more.
3. Be honest
Forgetting to mention a minor health issue could result in your policy not paying out for 'non-disclosure' hence our advice is always to be as honest as possible. Whether it is smoking habits, a bad back or occasional pins & needles - make sure your insurance company knows about it, this way you are safe in the knowledge that your policy will pay out when you need it to.
Mortgage Saints Ltd is an appointed representative of Home of Choice Ltd which is authorised and regulated by the Financial Services Authority.
