When you’ve the excitement of buying a new property, thinking about what would happen if you, as the main earner, unexpectedly died, is probably the last thing on your mind. Horrible thought but it really can happen. If it did, apart from anything else, how would your mortgage payments be met?
Taking on any form of debt needs to be considered very carefully.
Your biggest debt is likely to be your mortgage, the debt you have when you buy a property and take out a special kind of loan, a mortgage to fund it.
As you assess your budget, your income versus your outgoings, you determine how much you can borrow.
An absolutely key part of this calculation is your income.
As part of your assessment it is vital that you consider the scenario whereby your income is no longer being received.
Why could your income stop?
With the economic climate as it is, this may be because you are made redundant.
How about though if you are struck down with a critical illness or suffer a major accident?
Or there’s the scenario none of us want to talk about, your sudden, unexpected death.
All scenarios here are likely to directly impact on your income and thereby your ability to make your mortgage repayments. Your ability to continue to pay off your debt.
How can you protect your mortgage payments?
With some planning you can take out insurance to help protect your payments.
Mortgage life insurance pays out a cash sum to help pay off your mortgage if you die during the term of the policy. This means your loved ones, your dependants, could continue to live in the family home without worrying about the mortgage.
There are different types of policy available to meet differing needs:
- Level Term Mortgage Life Insurance or Assurance – the sum assured remains fixed for the term, meaning the same £250,000 will be paid out in year two or year fifteen of your mortgage. With this kind of policy surplus of funds over and above your mortgage debt can pay for other expenses such as a car, school fees, bills and general living. The monthly premiums will remain fixed over the term of the policy.
- Decreasing Term Mortgage Life Insurance – designed to protect a repayment mortgage which means the cover declines roughly in line with the amount outstanding on your mortgage. So if you have a mortgage of £250,000 and make a valid claim in Year 1, the amount paid will be in line with £250,000. If however you make a claim in year fifteen, at which point perhaps you only have £100,000 left on your mortgage, the amount paid will be in line with £100,000. Your monthly premiums are the same but will be less than an equivalent Level Term policy.
There’s also Whole of Life Assurance, a policy that will pay out whenever you die. The premiums are linked to investments such as pensions or endowments and are more expensive than on a level term life policy.
You can add extras to your Mortgage Life Cover
One of the most common extras is critical illness cover.
This pays out if you contract one of a list of conditions as defined within your policy’s terms and conditions.
Be aware though that if you combine critical illness with mortgage life insurance, your pay-out will occur only once on whichever event happens first, either death or suffering from a serious illness.
So, do you need mortgage life insurance?
Hopefully, as you’ll conclude from this article, you need to consider how you will cover your mortgage payments should your income stop for whatever reason.
An option to do this is to take out mortgage life insurance.
Take time to think about which type of policy best suits your needs.
As with all insurance, the cheapest policy isn’t necessarily the best.
Equally just opting to take a policy offered by your mortgage provider because it’s convenient is not necessarily the best. There are plenty of providers and different policies available.
Do the research and if need be get professional advice.
Finally, why Assurance and not Insurance?
You may have noted the reference to an Assurance rather than an Insurance policy and may be wondering whether this is valid or just a typo.
It is very much valid and it’s because assurance is for something that is certain to happen, insurance is where there is only a risk of it happening. Death of course is assured.
There is some interchange with ‘insurance’ as some would argue that there’s no guarantee you’ll die within the term of your policy.