Why we need mortgage life assurance
You are in the process of setting up a mortgage to buy a property and one question that inevitably crops up is – should I take out mortgage life assurance?
Mortgage lenders strongly advise it. And it does seem to make sense. For you, as a borrower, it slashes the risk of your property being repossessed if the worst comes to the worst and you depart this earth before the mortgage has been paid off. It is, of course, particularly well worth considering if you know for a fact that your partner would struggle to pay the mortgage on his/her own, or if you have dependent children, who would therefore be protected from the additional trauma of losing their home as well as a parent.
The lump sum payment in the event of your demise could be used in a variety of ways . To pay off your mortgage is obviously the main reason for taking out the policy, but it could also be used for paying bills and everyday running costs; funding the education of your children; or covering funeral expenses. There are several types of life assurance cover available and surely one of them will suit your particular circumstances.
Take, for example, decreasing term life insurance which means that the sum assured correlates with the amount you have outstanding on your mortgage. In other words, as your mortgage decreases, so does the amount paid out by the insurer.
Then there is level-term insurance, which pays out a fixed amount for the term of the policy, regardless of how much is owned on your mortgage. As you would expect, premiums for this type of cover are higher than those providing decreasing term life insurance. Increasing term insurance means that the benefit actually increases with each year of the term of the policy. Therefore this type of insurance is even more expensive. The great benefit, of course, is that it mitigates the effect of inflation.
A whole of life insurance policy will pay out whenever you die and tends to be linked to investments such as pensions or endowments. Again the cost is relatively high. Finally there is convertible term insurance whereby, when your life policy is nearing its completion, you can choose to make it permanent by converting the policy to an endowment, increasing term or whole of life product.
Some providers will pay out while the policy holder is still alive if they are diagnosed with a terminal illness, and some offer cover whereby they pay out on diagnosis of a number of pre-defined critical illnesses such as a heart attack, stroke or cancer.
It could well be that, if you live on your own and have no dependants you may decide it is not worth taking out additional mortgage insurance. That is your prerogative. Generally speaking, though, taking out mortgage life insurance is one way of bringing peace of mind to the situation, because you no longer have to worry about what if….