A mortgage is a financial commitment for the long term, it could be 35 years or more.
But the sad fact is that life is uncertain, and yours may not last that long.
Mortgage protection insurance, often referred to as mortgage protection, is designed to cover the cost of your mortgage if you were to die. As long as you have taken out the most appropriate type of policy. have maintained your premiums, the sum assured matches the outstanding mortgage balance and there haven’t been any changes to the mortgage that leave a shortfall then this is typically paid as a lump sum to your lender and means there will be no more to pay on the property.
You may not care much whether the lender will get the money or not, but you will probably want whoever will inherit your home to receive it mortgage-free, especially if they are a loved one you shared that home with.
At Continuum we are looking at what Mortgage protection insurance is, what it does, and whether it is suitable for you.
A special type of life insurance
Most mortgage protection policies are a special type of life insurance that offer “decreasing cover”. Unlike the usual level cover provided by most life policies the potential payout steadily falls throughout the policy term. That’s because during the term you’ll pay off more of your mortgage, and the debt you need to cover will be smaller. Compared to level cover, where the payout doesn’t change, decreasing cover is usually cheaper.
So, your outstanding mortgage could be paid off, while you pay less for the policy
Do you need it? Legally, you don’t have to take out mortgage life insurance when you take out a mortgage, although some lenders will insist on it to protect their loan. You might want to buy cover anyway if your loved ones would struggle to pay the mortgage without you.
If you have an interest-only home loan, the amount you borrowed remains fixed amount until the repayment plan ends. Decreasing cover cannot cover this and a level cover policy will be required to pay off what you have borrowed.
Payouts from a life insurance policy are generally not subject to income and capital gains tax, but it could potentially be subject to 40% inheritance tax.
This can usually be avoided by writing the policy in trust, which places it outside the estate so that the proceeds are paid directly to beneficiaries and do not count towards inheritance tax on death. As a result, the payout will not count towards the £325,000 nil‑rate band, above which inheritance tax may become payable. This threshold can increase to up to £500,000 where a main residence is passed to children or grandchildren
Doing this also means the payout to your loved ones is normally paid without delay, as they do not form part of the probate process . If you have a joint life, first-death, mortgage protection policy, the payout is normally made directly to the surviving policyholder. This is because the become the sole owner of the policy on first death. However, this only applies to first-death policies, and the exact treatment can vary depending on how the policy is set up. This will probably mean that there is no need for a trust, as there is usually no inheritance tax on estates left to spouses and civil partners.
Getting the cover that is appropriate for you
You might want to consider adding health cover to your decreasing life cover, which could provide a financial lifeline if you were unable to work or bring in an income to cover the mortgage due to ill health.
Permanent Health Insurance cover or Income Replacement policies are designed to provide you with a replacement income if a long-term sickness or disability prevented you from working. They are designed to pay out a guaranteed level of income every month for as long as you are unable to work, if necessary until you reach state retirement age.
Critical illness cover is designed to pay out a lump sum if you contracted one of the conditions covered in the policy.
How much will it cost?
Buying a home is expensive, and keeping costs to a minimum is essential. A decreasing level policy could provide the cover you need at a minimum cost, while allowing you to add more cover to protect against other needs as they come along.
Like other types of life insurance costs will vary according to your age, health and the level of cover you need – and the provider.
At Continuum we can help you find the mortgage protection you need that is suitable for you at the most competitive price, and find solutions for your other protection needs to help provide a complete financial safety net.
To get the protection that is appropriate for you, your home and your loved ones, call us today.
This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your mortgage or insurance planning.
Your home may be repossessed if you do not keep up repayments on your mortgage.
You should refer to policy documentation and seek advice in order to understand what a policy does and does not cover before making any application.
