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Mortgage Protection

If for any un-foreseen circumstances, you are un-able to afford the repayments on your mortgage loan; your home will be at risk of repossession. A Mortgage protection policy is a pure life insurance policy with a falling sum assured, designed to protect the remaining owing of a repayment mortgage. The average mortgage in the UK is over £100,000, which is usually paid back over a stretched period of time, up to 25 years. Mortgages are secured on the value of your home meaning that you must obtain a valuation of your home. The mortgage repayments come out of the income of the applicants for the mortgage.

What mortgage protection provides

Mortgage Protection insurance provides you with cover, should anything happen (such as losing your job) which may cause you to be unable to keep up repayments.
Or should the person paying the monthly repayments happen to die, there may be no way for the bereaved to keep up the mortgage repayments. A potentially devastating situation could occur where as by your dependents may lose the house. You need to take out a life insurance policy to cover these circumstances.

You will not need an unattached insurance policy with an endowment mortgage, as in this instance the life cover is already included. It’s not nice to dwell on the worst things in life. Which is why there are straightforward Mortgage Protection Plans to cover your family if you die or become terminally ill.

The nature of a repayment mortgage is that you take out the loan for a certain amount and that you repay the loan over a certain period of time. All being well, after that term is up, you will have paid off your mortgage. As the term progresses, thus the amount that you owe decreases.

Term insurance policies

A term insurance policy is quite alike, in that you are again covered for a certain amount over a certain period of time, with the difference being that the insurer will pay out should an event occur where as by you are un-able to make the repayments. This event would be your death in the case of term insurance.
If you were to take out a mortgage of £200,000, you would need £200,000 of cover with your policy. Once you pay the monthly payments, at the end of a year you may have £195,000 left (with most of your monthly payments going towards interest in the first year). So, at the start of the second year, you would only need £195,000 of cover. After each premium is paid, you would need a decreasing amount of cover, which is why mortgage protection is also called decreasing term insurance.

The amount assured in a mortgage protection policy reduces by an agreed amount, which is usually the same, over the course of the term. The sum will only be paid out should the person whose life is insured, die during the course of the term. There is no surrender value and premiums will be lower than for level term insurance, due to the decreasing sum assured.

It is also worth bearing in mind that the fixed term means you have no flexibility, and you can't lengthen the cover.