Mortgage Life Insurance. Decreasing Term vs Level Term

When we think about life insurance, we typically think of the large cash pay outs should the worst happen, but a mortgage life insurance product is created specifically to cover the outstanding mortgage should those events unfold.

The aim of a mortgage insurance product is to provide reassurance that should you or your loved one pass away, the remaining partner and any possible children would be catered for and have one less thing to thing about while going through grief and loss.

Typically, there are 2 types of mortgage insurance; level term and decreasing term, but what do they both mean and which suits your needs best?

Level Term Life Insurance

A Level term policy fixes the amount paid out for the length of the policy.

These policies tend to be more expensive, as they pay a defined lump sum if you die within a fixed time, for example, £200,000 if you pass within the next 18 years. However, this could be better if you want to leave a lump sum for your dependents to cover more than just your mortgage, for example other debts and/or ongoing spending.

Level-term is also likely to be a better bet if you have an interest-only mortgage, as the lump sum would be available to cover the capital rather than just the repayments.

Decreasing Term Life Insurance

This is the most common, and usually the cheapest, as the amount you're covered for decreases as you pay your mortgage off (though your monthly payments stay the same). This leaves your dependents with enough money to pay the rest of the mortgage.

It's therefore designed for repayment mortgages – the most common type where the amount you borrow is fully repaid at the end of the term.

Do you need Mortgage Life Insurance?

If your income is being relied on to ensure the mortgage payments are covered then and they would likely struggle without it, then securing life insurance could be a good value option.

While Life Insurance is not a compulsory requirement, it could be worth weighing up the options and seeing if its right for you. There are a couple of things to consider:

• If you don't have dependents, you don't need life insurance.

You may not need to get a mortgage life insurance policy (or indeed any other sort of life insurance) if no one relies on your income to pay the mortgage, eg your partner and/or children. It would mean, however, that whoever inherits your property may need to sell it, unless they're in a position to pay off your mortgage, or get a mortgage on the property themselves.

• If you've already got a life insurance policy, you could already be covered

You may not have 'mortgage insurance', but if you already have a level-term life insurance policy then this will give your dependents a lump sum if you die. However, they would want to use the insurance sum to pay off the mortgage, you'll need to ensure the amount you're covered for exceeds the amount you owe, and the policy is in force for as long as your mortgage term.

If you’d like to discuss your Life Insurance options, do get in touch today to give yourself some New Year reassurance, just in case.