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What is life insurance?
When you have your mortgage, it is a good idea to protect your home and family in case you pass away. This is where life insurance comes into play. Life insurance is an insurance policy that pays out a lump sum to your beneficiaries when you die.
It is designed to provide peace of mind that your loved ones won’t struggle financially or lose their home if you are no more.
Should I take out life insurance when I apply for a mortgage?
When you decide to take out a mortgage, it is a big financial commitment, which means that you should have a contingency plan to safeguard this decision in case the worst should happen to you.
Although it is not mandatory to take out a life insurance policy when you apply for a mortgage, it is definitely a good idea, especially when it means that your family will not have to worry about the roof over their heads when they need it most.
How does life insurance work?
When taking out a life insurance policy, you will choose an amount of cover (you can choose your mortgage amount as cover, for example) for a particular term (usually your mortgage term), then pay monthly premiums for that term.
If you pass away during the term of the insurance, a cash lump sum will be paid out to your family, with which they can pay off the mortgage or any other large debts they have, or use it in any way they please.
There are three types of life insurance cover: level term assurance, decreasing term assurance and whole-of-life cover.
Level Term Insurance
Level term insurance is an insurance policy in which premiums remain the same throughout the term. It also has the benefit of remaining at the same amount throughout the term, so that even if your debt continues to fall, you will still have a pay-out that can be used for other purposes in the event of your death.
Decreasing Term Insurance
Decreasing term insurance policy is one in which the cover amount decreases as the mortgage is paid off. So eventually, the cover amount becomes £0. If the policy holder dies towards the beginning of the policy, the pay-out is more and if they die towards the end of the policy, there is less of a pay-out. This type of cover is usually cheaper than the level term cover.
Whole Of Life Cover
In this type of life insurance cover, you will have to pay the premiums for the rest of your life (until you die). This type of cover is more expensive than the others.
How much will taking out a life insurance policy cost?
The cost of a life insurance policy will depend on several factors like your age, health, any medical conditions you have and also the type of cover you choose.
Typically, the monthly premiums for decreasing policies are cheaper than for term assurance policies because the level of cover reduces over time. The costliest policies are the whole-of-life insurance policies because this type of cover provides protection for your entire lifetime.