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Mortgage life insurance

When you purchase a new home, the experience can be both daunting and exciting. It’s a new adventure, but there are lots of things to consider. Whilst it’s a huge milestone in a person or couple’s life, the amount of paperwork, legal documents and financial obligations can be overwhelming. With all this it’s important to know throughout the process which areas are necessary, and which are just “nice to haves”.

We all know that mortgages are (in most cases) necessary - but what about life insurance for mortgages? In this article we look at whether that is just a “nice to have” and what value it can bring for someone buying a property.

What is life insurance?

Life insurance is an insurance policy that upon the death of the policyholder pays out a lump sum to named beneficiaries. If you have family or loved ones who depend on you for financial support, or maybe long-term loan obligations (such as a mortgage), then life insurance is something that you should be thinking about purchasing if you don’t already have it. It provides a sense of financial security and peace of mind for those who you will have left behind, and also for you, knowing that additional financial burdens upon your passing can be avoided. Big expenses like living-costs, food bills, the children’s education can all be met in your absence by a life insurance policy.

When do you need life insurance?

Life insurance is not something you tend to think about when you are younger. The reason behind this is firstly well, you’re young and barely think beyond the week ahead. But more seriously it’s because you most likely do not have the financial obligations that make purchasing life insurance a useful option to you. As you get older, your income increases, the amount of people depending on you for financial support goes up, and you have serious long-term financial responsibilities such as a mortgage on your property. That being the case, it’s pertinent to address how these would be resolved if you weren’t around to pay for them anymore. Not having this financial protection could have serious adverse effects on those who are left behind to clear things up in your name.

Indeed mortgage repayments are a huge outwards expense and tend to take up a significant percentage of your monthly paycheck. Whether you are a single income household or a joint income household, the absence of your income could be devastating for your partner’s ability to pay this mortgage every month. The payout by your life insurance policy can alleviate this burden significantly for those left to pick up the pieces.

What is life insurance for mortgages?

The simplest life insurance policy sets a fixed payout at the beginning of the policy term, and that payout will remain static throughout. Whilst life insurance for mortgages might sound pretty self-explanatory, there are some nuances when compared to the traditional life insurance policy.

In the event of the policyholder’s death, life insurance for mortgages provides a paid benefit for the outstanding mortgage payments. Because of the way in which mortgages work, this affects how life insurance policies designed to meet this need work also.

How does life insurance for mortgages work in practice?

If you’re purchasing life insurance so that your loved ones will have some financial assistance when you die, then level/fixed cover policies are probably suitable for you. Just as the amount you wish to leave to your dependents is probably fixed (maybe it only needs to be over a certain threshold), so too will the payout from your life policy.

Mortgages however work a little differently. If the purpose of the insurance policy is to cover the value of the mortgage over time, it would not make sense to have a fixed coverage amount. This is because the value of the mortgage as it gets repaid decreases over the years. Purchasing a fixed cover policy for the purposes of covering a mortgage repayment will only result in the policyholder over-purchasing their insurance needs. The product more suitable for these mortgage repayment obligations is decreasing cover. Decreasing cover (as the name suggests) means the payout you receive decreases in time. At the end of the policy, the payout will be zero. Why? Because your mortgage obligation will also be zero too. These policies work in tandem with your mortgage so that the coverage you’re buying is enough to meet what’s left to be repaid. That way it ensures you are not buying more than you need to, and is a far more cost-effective purchase than the alternative.

Do I have to buy life insurance when I get a mortgage?

There are many insurance policies that one has to consider when buying a property such as contents insurance and home insurance. Contrary to popular belief, life insurance is not compulsory when getting a mortgage. It is recommended, but there is no obligation to purchase this. The only insurance that must be obtained during this process is building insurance, which gives your mortgage lender the certainty that the property they are underwriting is covered and will have value at the end of the mortgage period.

Does life insurance have to be purchased through my mortgage provider?

There is no obligation to purchase your life insurance policy through your mortgage provider. They might pressure you or give you preferential terms, but as mentioned, it is not compulsory and you can either go elsewhere for this product, or just decide not to buy it at all.

Where can I buy my mortgage life insurance?

The best place to familiarize yourself with what the life insurance market is offering today will be via price comparison sites. These will give a quick (and free) overview of what kind of deals are on offer to you. If you find yourself in more unique circumstances however, do consider the use of a specialist insurance broker who will be able to find a policy that suits your needs.