Mortgage life insurance is typically cheaper than level term life insurance – where the amount of cover is constant throughout the policy – as the size of the pay out decreases over the term of the policy, in line with the reduction in your mortgage debt.
It is also referred to as decreasing term life insurance and is usually bought alongside a repayment mortgage. It is designed to clear the outstanding home loan if you die within the term.
How to work out the amount of cover you need
Let’s say you have a repayment mortgage of £250,000 over 25 years. You could take out level term insurance, which would pay out £250,000 if you died at any time within the 25-year term. But if you died after 15 years, the outstanding debt would be less than £250,000. You could therefore end up paying for more cover than you need. Mortgage life insurance solves the problem because the size of the pay out falls roughly in line with the amount of outstanding mortgage debt.
Mortgage life insurance is often cheaper than level term insurance, but it does not suit everybody. It works best if you have a repayment mortgage and your dependents have enough money to cover any other expenses, such as household bills, in the event of your death.
Is mortgage life insurance right for me?
Let’s say you and your partner both earn £30,000, you have a repayment mortgage of £150,000, but no children. Your partner would struggle to pay the mortgage without your salary but could manage the other living expenses. Mortgage life insurance might therefore be a suitable option because it would ensure your partner could keep the roof over his or her head.
But if your partner was taking a career break to look after young children, or earned only a small income, you might be better off with level term insurance. You could then not only leave enough money to pay off the mortgage, but also make provision for your family’s ongoing financial security.
Level term insurance is also the better option if you have an interest-only mortgage because you pay off only the interest each month so the capital debt remains the same.
Pros and cons of mortgage life insurance
While mortgage life insurance is cheaper than level term life insurance, it’s worth weighing up whether it’s the best option for your family after you pass away.
- Mortgage life insurance is usually cheaper than level term insurance.
- The pay out will clear any outstanding mortgage debt if you die within the term, allowing your loved ones to remain in the family home.
- Mortgage life insurance clears only the outstanding mortgage debt. It does not pay off any other debts, or make provision for your family’s future financial security.
- It is not suitable for an interest-only mortgage.
Many lenders insist you take out appropriate life insurance when you arrange your mortgage. But it’s important to remember that you do not have to buy cover from your lender – and it’s often cheaper elsewhere. It’s also a good idea to compare quotes for both level and decreasing term assurance, because you could be able to buy more cover for little or no extra cost.