Although it is not compulsory, most mortgage lenders strongly encourage you to take out mortgage life assurance to cover your loan. To mitigate some of their risk, it has been known for some lenders to increase the interest rate charged for those who do not arrange life insurance.
In any case, if you have a partner and a family, mortgage life assurance will allow them to stay in their home should the very worst happen to you. The life cover will guarantee to pay off your home loan in full if you were to pass away provided you set the sum assured on your life policy equal to the amount outstanding on your loan.
Level or decreasing mortgage term assurance?
Mortgage life assurance is sometimes called mortgage term assurance because the life policy has a specified term, which should be set equal to the term of your mortgage loan. Cover can be arranged whether you have a principal repayment loan or an interest only loan.
Repayment Home Loan
For a repayment loan you should take out decreasing mortgage term assurance, as the sum insured will decline in-line with the amount outstanding of your loan.
Interest Only Home Loan
For an interest only loan you should take out level mortgage term assurance, as the life cover will remain fixed over the term of the policy in-line with your mortgage loan. Naturally, decreasing term assurance commands a lower premium as the insurers risk is reduced each year relative to level term assurance.
Joint mortgage life assurance
If you have a joint mortgage loan then it is perfectly reasonable take out a joint life assurance policy so that you have joint protection cover. The policy would payout on first event, leaving your partner with the funds to pay off the loan and remain in their home.
Including critical illness cover
Mortgage critical illness cover can easily be added to your life insurance policy. This added protection will payout a tax free lump sum should you suffer one of the critical illnesses specified in your insurance policy.
Reputable critical illness policies will include over 30 critical illness events, such as cancer, heart attack and stroke. Critical illness policies will even cover events such as blindness and third degree burns, and most good policies will include some level of additional child cover as standard.
Guaranteed or reviewable premiums
A mortgage life assurance policy with guaranteed premiums promises never to increase the monthly premium charged throughout the life of the policy. For example, if your monthly premiums are £15 per month at the outset of the policy it will be £15 at the end, whether that is in 5 years or 15 years.
Reviewable premiums however give the insurer the right to review the risk associated with your policy and adjust your premiums accordingly throughout the life of the policy. Over the term of the policy guaranteed premiums tend to work out cheaper due to their fixed nature.
Write the policy into trust
It is usually always best to write life policies into trust. Although the aim of the policy payout is to pay off the loan in the event of death and not for inheritance purposes, writing the policy in trust can nevertheless save money on solicitor’s fees, probate fees and save a whole deal of time.
If you write the policy into trust with your partner as the beneficiary then they can pay off the lender should the worst happen. If you have a joint life assurance policy then there is no need to write the policy into trust as the insurer will automatically payout to the surviving policyholder.
Next Steps
We are here to help, if you require further information, advice or simply want to compare mortgage life assurance quotes please do not hesitate to contact us. Dealing with insurance day in, day out we are in a great position to help you find the right plan at the best price.
For general information and news relating to the UK insurance market please navigate to the homepage of the Association of British Insurers (ABI). If you would like more information on the use of trusts for inheritance tax avoidance purposes please navigate to the website of the HMRC.
