Why Should I Take Out Life Insurance When I Get A Mortgage?
For most people, a mortgage is the largest financial commitment they’ll ever make in their life. Due to that, it’s prudent to get some insurance. Here we’ll go through the types of insurance available and whether or not they are right for you.
While some people think that life insurance is mandatory for a mortgage, the truth is that only buildings insurance will be compulsory. This type of insurance aims to protect the bricks and mortar should anything fundamentally wrong happen with the property.
The types of events that building insurance covers for is damaged caused by fire, floods, fallen trees, subsidence and vehicle collisions. In such incidents as these, the costs of repair are often vast and far above what most people can reasonably pay for.
Your mortgage lender should give you a choice of insurers to choose from and they should at least cover the value of the mortgage. If you live in a high-risk area, such as a flood plain, then you may have to pay extra for this cover.
This will not be a prerequisite to getting a mortgage. While that is true, it is sensible to have. If you have a flood, for example, then buildings insurance would protect you for any structural damage to the property. Any possessions such as white goods, sofas and computers wouldn’t be covered by buildings insurance but would be by contents cover.
If you’re moving from another home, you should be able to switch your cover over to your new property with minimal issues. Contents insurance is especially important if you live in a high-risk area or have valuable items, such as jewelry.
While not being a legal requirement, life insurance is very common when taking out a mortgage. There are some lenders who would require you to have a policy in place. If this is the case, then don’t feel obliged to take out insurance with who they recommend.
There are two main types of life insurance and they both have their pros and cons.
Full life cover – This is where you’ll pay into a life insurance policy for the rest of your life and your beneficiaries will receive a lump sum when you pass away. This lump sum will be enough to cover the mortgage with money potentially left over.
Term cover – Term cover is often much cheaper as they payout will reduce as your mortgage balance reduces. If you were to pass away during the life of the mortgage, the remaining balance would be paid off by your cover.
The merits of having life insurance cover will depend on one situation to the next. If, for example, the household requires your income to pay the mortgage and you are married with children then life insurance would be a sensible choice. Without life insurance, the mortgage may be unpayable and the home would be repossessed.
Critical illness cover
With this cover, you'll receive a payout if you get a critical illness as defined by the terms of the policy. Common critical illnesses covered are the likes of cancer, stroke and a heart attack. These are types of conditions that will either lead to premature death and/or make you unable to work.
It’s vital that you know exactly what is going to be covered. There are a few different types of cover available such as increasing, level or decreasing cover. These funds can be used to either pay off your mortgage or make the payments until you recover.
Income protection insurance
With the form of cover, you’re going to be protected should anything happen to your income. This could be anything not under your control that has affected your income such as an accident or redundancy. Actions under your control, such as being dismissed for gross conduct, generally aren’t going to be covered.
The terms of the plan are usually flexible and will be set up once you enter into the policy. You can opt for a specific amount to be paid each month or perhaps a set percentage of your income. You can also decide whether it will be a short or long term policy. As you can imagine the higher and longer the terms of the policy, the more expensive it’ll be.
Mortgage payment protection insurance (MPPI)
This is a much more specific form of income protection insurance. It aims to specifically cover your mortgage repayments should your employment situation change. The cover can be a little more flexible to cover household bills if you were willing to pay more into your policy. The duration can also be amended, depending on your needs.
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