What type of Life Insurance do I need to protect my mortgage?
This is generally called Mortgage Protection Insurance and is used if you have either:
- a Repayment Mortgage or
- an Interest Only Mortgage
You and you need insurance which guarantees that in the event of your death, your mortgage will be fully repaid.
You should be aware that all building societies and mortgage companies recommend, and some insist, that Mortgage Protection Insurance be taken out. You should also be aware that the cost of Mortgage Protection Insurance sold by building societies and mortgage companies is often up to 60% more expensive than identical insurance purchased on-line through us. All Mortgage Protection Policies purchased through us are fully accepted by building societies and mortgage companies.
Read this if you have a ‘Repayment’ Mortgage
The outstanding value of your mortgage decreases as you steadily pay off your mortgage each month. Therefore, each year you need less insurance to cover the repayment of your mortgage. Most Life Companies offer special Mortgage Protection Policies to cater for this situation. They call it ‘Decreasing Term Insurance’.
With these policies the level of cover is automatically decreased as your mortgage is repaid and it is the cheapest form of life insurance. Your insurance cover needs to finish on the date you are due to have fully paid off your mortgage. The length of time between now and that repayment date is called the policy’s ‘term’. Each year the Life Company calculates for you how much insurance you need to pay off your mortgage.
Read this if you have an ‘Interest Only’ Mortgage
The outstanding value of your mortgage remains constant as each month you are only paying off the value of the interest on the money you have borrowed. Therefore, the value of your insurance cover similarly needs to be constant to equal the value of your outstanding mortgage. In this circumstance you need what is called ‘Level Term Insurance’. Your insurance cover needs to finish on the date you are due to repay your mortgage. The length of time between now and that repayment date is called the policy’s ‘term’.
Please remember that the outstanding value of a mortgage is not affected by inflation and therefore, you do not need to worry about inflation proofing (i.e. index linking) your policy.