Why life insurance?
These are really horrible questions and ones which are uncomfortable to ask, but what if you or your partner was no longer around? Could you:
- Afford the monthly mortgage repayments?
- What about household bills?
- Maintain your standard of living?
- Would you have to go back to work?
- Who would look after the children?
- Could you afford childcare costs?
Having life insurance cover in place helps provide answers to all these really difficult questions, providing financial peace of mind.
For most of us, our mortgage is the largest debt that we’ll ever incur.
But, what’s the best way of protecting your property, so not to burden loved ones with a huge debt if the worst were to happen?
In life insurance terms you have 2 options; decreasing term or level term cover.
Decreasing term or level term?
A decreasing term policy is the most common and cost-effective way of covering your mortgage.
It’s designed to help protect a repayment mortgage. The amount of cover (or size of the payout) reduces over time in line with your mortgage debt.
This means your beneficiaries would receive enough to pay off the mortgage. However, there would not be funds left over for an inheritance or fund future living costs.
With level term life insurance, the payout remains fixed (or ‘level’) throughout the whole policy.
So, if you were to die at any point during the term, your beneficiaries would receive a fixed lump sum, regardless of whether that is right at the start or the end of the policy.
Both options are term-based policies. Which means cover only lasts for a set period of time and has a defined start and end date.
The term length
To fully protect the family home, it makes sense that your life insurance cover aligns with the length of your mortgage term.
However, if you have other reasons for needing life insurance, like meeting the future living costs or to leave an inheritance, you may want the cover to exceed your mortgage.
Do you have children?
Whether you have children or not is highly likely to impact the type of life insurance you decide to take out.
If you do not have dependents and only need to cover the mortgage, then decreasing term may provide sufficient coverage.
However, if you have children and wish to leave an additional lump sum, as well as cover the mortgage, then level term may better suited.
Repayment or interest-only mortgage?
If you have bought your home by taking out a standard repayment mortgage, then either decreasing or level term could meet your needs.
However, if you have an interest-only mortgage, and the capital borrowed does not decrease over time, then decreasing term would not be suitable to your needs.
The cost of premiums
As a general rule, level term premiums, which provide a greater level of protection, are approximately 20% more expensive than decreasing term.
However, it’s important to remember that there are many other factors which impact premium costs, such as age, current health, weight/BMI and whether you smoke.
With decreasing term cover the financial risk to the insurer reduces over time, which helps keep monthly premiums lower, compared to level term.
Save money, compare multiple quotes
From our experience many homeowners, especially first-time buyers, take out cover either through their mortgage lender or via their lender’s preferred insurer.
Normally, you can secure a much better deal if you compare multiple quotes yourself or use a life insurance broker.
There’s no right or wrong way to protect your home. It’s a case of finding the right policy to protect your unique needs.
At Reassured, we believe the best way of securing the right policy for the best price is to shop around and compare multiple quotes.
You could do this yourself online, or you could save yourself time and money and get a broker to do it on your behalf.
The most important thing is to make sure you do have sufficient cover in place. Start comparing quotes today.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.