When you take out a mortgage, the lender will almost certainly try to flog you some form of insurance, so it’s important to know exactly what they’re trying to sell you so you don’t end up with the wrong product.
Whatever you do, take the time to think about it
It’s important to remember there is absolutely no obligation to take out any type of life insurance when you get a mortgage. The only insurance you have to have in place when the ownership of a house transfers to you is buildings insurance, and that’s usually insisted on by the lender as a guarantee on its investment.
However it’s possible that your circumstances mean you should take out a suitable type of insurance.
But, even if you get the right product, if you buy it from your lender and fail to shop around the whole insurance market in order to get the best deal, the chances are you’ll end up paying over the odds.
Do I really need it?
Most lenders will try to flog you a “life insurance policy”, but these are only really necessary if you have dependents such as a partner or children who will struggle with the mortgage repayments in the event of your death.
If you are young, free and single, there’s really no need to get this insurance as no-one will lose out financially if you die, except perhaps the mortgage lender, who will have to sell your house to pay off your mortgage.
If you do have people to worry about in the event your death and think mortgage life insurance would be a good idea, it is also important that you don’t confuse mortgage life insurance with life insurance.
There are a number of different types of life insurance - mortgage life insurance is just one.
Mortgage life insurance
In short, mortgage life insurance will pay out a lump sum to cover the amount outstanding on your mortgage should you die.
There are two major types of mortgage life insurance:
- Decreasing mortgage term insurance
This is the most common form of mortgage term life cover, and is designed to cover repayment mortgages.
With decreasing term insurance, the level of cover declines over time, so it is always equal to the amount of debt outstanding on the mortgage.
- Level mortgage term insurance
Level term insurance is generally used to cover an interest-only home loan.
With this type of insurance, the amount of cover will remain the same throughout the life of the policy, just as the amount of mortgage debt will remain the same.
Normal life insurance
Different to mortgage life insurance, which is only to be used to cover the mortgage debt, with normal life insurance you are insuring yourself in the event of your death.
This means a lump sum will be paid out to your beneficiaries to spend on whatever they like, such as funeral costs and other debts that might need to be paid off. Obviously this can also be used to pay off the mortgage if need be.
Remember though that neither of these policies will pay out if you lose your job or get sick, but will help your family if you were to die.
THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP
REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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