Mortgage life insurance

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What is mortgage life insurance?

Mortgage life insurance is normally bought to cover the costs of your mortgage. This is so that in the event of your death, your loved ones can pay off your outstanding mortgage debt. You might have also heard it being called decreasing term life insurance.

The amount that you’re covered for decreases over the term of your policy, in the same way that the size of your mortgage decreases. Usually, mortgage life insurance is cheaper than a level term life insurance policy. However, it’s a good idea to get quotes for both and decide which one best suits your needs.

When you buy a house, your mortgage lender might attempt to sell mortgage life insurance to you. But you aren’t obliged to buy from them, so you should take your time and compare life insurance quotes, to make sure you find a policy that best suits you.

Most mortgage life insurance providers have a cap on the interest rate that you’re charged. So, if your mortgage life insurance cover is capped at 7%, but your mortgage’s interest rate is 8%, then your payout might not cover the full amount of your outstanding debt.

I’m thinking about taking out mortgage life insurance, what should I consider?

When deciding if decreasing term life insurance is the best option for you, it might be worth considering these factors:

• If you don’t have any dependents (for example, no child or spouse) you may want to just make sure that your mortgage is covered, as you have no one looking to you for any additional financial support.
• If you do have a family, then a level term life insurance policy might be better suited to you. This will not only cover your mortgage but will leave your family extra cash to help them keep their same standard of living after you’re gone. For more guidance on how to find the best policy to protect your family, head over to our family life insurance guide.
• Are there any other financial commitments, such as loans or credit cards, that you would want covered in your life insurance payout? If your life insurance policy doesn’t cover your debts, it will be up to your next of kin to find the cash and pay up to your debtors.

Why might I need mortgage life insurance?

There are various reasons why you might choose to buy mortgage life insurance. Buying any type of life insurance is a very personal decision, but some typical reasons include:

• Ensuring that your dependents are able to pay off any remaining mortgage debt, should the worst happen to you.
• Some lenders might ask you to have a policy in place when you’re buying a house.

If you’re looking for a more advanced level of cover, then mortgage life insurance with critical illness cover might be of interest to you. Whilst a life insurance policy pays out if you die during the term of the policy, critical illness cover pays out if you develop a debilitating illness (that is covered by your provider) during the term of your policy.

What’s the difference between guaranteed and reviewable premiums?

Depending on what life insurance policy you choose, you’ll be offered either guaranteed or reviewable premiums.

If you choose reviewable premiums, then your insurer has the right to assess and adjust the premiums periodically according to a number of risk and economic factors, including things like interest rates or advances in medical treatment. 

Although insurance which has reviewable premiums might have a low cost initially, you could end up paying significantly more in the long run. But if you want to take out a long-term policy with a high-value payout, then a reviewable premium allows you to mitigate the value of the payout against the rising cost of living. 

Your age and health concerns are only considered when you take out your policy, so although your payout and premiums might be higher than other policies, they would be lower than if you needed to take out more cover at a later stage, when you’ll be older and with more health concerns.

With guaranteed premiums, the amount that you pay for cover is fixed until the policy term ends. If you’re on a strict budget, then choosing a policy with guaranteed premiums could help you to stay in control of your monthly outgoings.

How much does mortgage life insurance cost?

There’s no easy way to calculate this because every mortgage life insurance quote is different for each person. 

Providers calculate premiums based on the risk of them having to pay out. They look at your age, sex and health and then make a judgment on how likely you are to make it until the end of your mortgage term. 

Generally, the healthier and younger you are, the less that you’ll have to pay. Making lifestyle changes like quitting smoking or attaining a healthier weight can have a positive impact on your mortgage life cover premiums.

Some companies will refuse to cover certain individuals based on specific conditions. For example, some might refuse to insure people over age fifty, while others may exclude people that have any ongoing health conditions such as diabetes.

It’s wise to shop around and compare policies to find better deals. Always look closely at the small print, as a cheap life insurance policy might indicate limited cover. Ultimately, you should base your choice on how much coverage you want, and how much you cab afford to pay for your monthly premiums.

Should I take out joint or single insurance?

If both you and your partner are paying off your mortgage together, some insurers offer the option to take out joint or single mortgage life insurance. 

A joint policy pays out upon the death of the first policyholder. A couple might find that a joint policy is easier to set up than a single one, and it’s normally cheaper. However, it’s important to think about what might happen if you and your partner were to separate if you have a joint policy. 

If you decide upon separating to get a single policy instead, remember that you will be older by this time and can expect your premiums to have increased.
 
Taking out two single policies from the start means that you’re both covered in the event of a separation, and unlike a joint policy which only pays out once, two single policies will pay out once per policyholder.

For more information, head over to our page on single vs joint life insurance.