What is mortgage life insurance, and why do I need it?

Purchasing a home with a mortgage is an exciting step that requires planning for the future, and we don’t just mean what’s for dinner on move-in day.

You want to make sure your new home is future-proof, which means you need to consider what would happen to your mortgage repayments if you were to pass away.

It’s an uncomfortable thought but one that needs to be considered. The potential financial burden your mortgage could place on your loved ones would be unfortunate.

Thankfully, this is where mortgage life insurance policies come in.

What is mortgage life insurance?

Mortgage life insurance is a type of life insurance that covers the cost of your mortgage if you were to pass away. That means the remainder of your mortgage would be paid off, significantly reducing the financial load on your loved ones.

Mortgage life insurance covers the remainder of your mortgage if you were to pass away. There are different types of life insurance policies which we will be explaining shortly, but they are all designed to make sure your mortgage doesn’t become a financial burden on your loved ones in your absence.

Mortgage life insurance is not legally requirement to get a mortgage. That said, depending on your lender, your mortgage make include a life insurance policy.

Taking out life insurance with your mortgage is convenient as you’ll be covered from day one, and it is very common to do so.

It means that regardless of what the future holds your mortgage will be covered if you were to pass, and your loved ones will still have a roof over their heads.

Different types of Protection Insurance

There are other alternatives available to protect your ability to repay your mortgage in an unfortunate situation, such as critical illness insurance and income protection.

Income protection, as the name suggests, provides a fixed amount or a percentage of your earnings if you must stop working due to an injury or unexpected illness after an agreed deferred period.

The deferred period is typically from the first day out of work to the first day you’re eligible for a benefit payment.

Critical illness insurance will pay a lump sum towards your mortgage if you were to be diagnosed with a critical illness.

This will help reduce any stress or concern around your mortgage payments during this difficult period.

You could even take out these policies on top of life insurance to know you’re completely covered.

What does ‘decreasing term’ mean?

A decreasing term policy is a mortgage insurance policy that reduces its payout in line with how much you still have to pay on your mortgage.

Most mortgage life insurance policies are decreasing term policies.

That means it pays out the exact amount you still owe on your mortgage if you were to pass.

As you’ll be making monthly payments towards your mortgage, the amount owed and thus the amount these types of policies payout decrease, hence ‘decreasing term’.

What about a ‘level term’ policy?

A level-term policy has a fixed payout for an agreed fixed period. Unlike decreasing term mortgage life insurance policies, as you pay off your mortgage the amount that would be paid out in your passing stays the same.

As the payout stays the same, as you pay off your mortgage there will be less to cover in your passing. Your loved ones will receive a cash payout, on top of the remainder of your mortgage covered, equivalent to how much you had paid off on your mortgage.

Taking out a mortgage is big leap, and one that’s sure to fill you with excitement. It’s best practice to go into it with a plan, so taking a life insurance policy out with your mortgage is a good way to ensure your loved ones don’t have a significant financial burden after you’re gone.

Everyone’s requirements will be different, so if you’d like to talk through your options with a trusted advisor, press the button below to book your initial appointment.

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