Mortgage protection insurance
Mortgage protection insurance is a life insurance policy designed to pay off your mortgage if you die during the term. It runs for the same length of time as your mortgage. So, if you take out a mortgage over 20 years, your mortgage protection insurance must also be in place for 20 years. If you die, your insurance company pays the policy benefit directly to your mortgage lender. Your lender uses the amount needed to pay off the mortgage and, if there is any left over, they will pass it to your estate. You can change insurer during the term of your mortgage if you find better value elsewhere.
By law, your lender must make sure that you have this cover before taking out a mortgage. However, your lender may allow you to take out a mortgage without having mortgage protection insurance if:
Types of mortgage protection
Generally, your mortgage protection cover reduces over time, as the amount you owe on your mortgage goes down. This is called 'reducing term cover'. It is the most common and the cheapest form of life cover.
You can also get a more expensive type of mortgage protection policy, known as a 'level-term policy'. This gives you the same amount of life cover throughout the mortgage term. It is usually used for an interest-only mortgage or an endowment mortgage, where the original mortgage amount is still owed until the end of the mortgage term.
But you can also use a level-term policy with a traditional decreasing mortgage. This means you will have more life cover than is needed to clear your mortgage at any point in time, so the extra benefit would be passed on to your dependants if you die.
If you wish to, you can add serious illness cover to your mortgage protection policy. This means your mortgage will be cleared if you die or if you are diagnosed with a serious illness that is covered by your policy. But your premium will be considerably higher if you choose to add on serious illness cover to your policy. Check out our life insurance survey to get more information on costs.
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