What type of Life Insurance do I need if I have a mortgage?
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Mortgage Life or Mortgage Protection Insurance is an insurance that specifically covers your mortgage in the event of your death. You need this type of insurance if you have a repayment mortgage. If you have an interest only mortgage then you need term insurance. We have gone into this in more detail below.
When you take out a mortgage you may be obliged to take out some insurance to fit in with the terms of your mortgage provider. However, don't just buy the insurance they provide because they can be up to 60% more expensive than the cheapest insurance provider - so it's well worth shopping around.
With a 'Repayment' Mortgage
The outstanding value of your debt decreases as you gradually pay off your mortgage,
so consequently you need less cover each year. The best insurance for you is 'Decreasing
Term Insurance' which automatically decreases as your mortgage is repaid. Your insurance
cover ends on the same date as your mortgage. The duration of the policy is known
as the policy's 'term'.
With an 'Interest Only' Mortgage
With an interest only mortgage you are only paying off the interest, and the capital
you borrowed remains the same until the very end of the mortgage term. This means
that the amount you owe stays 'level' and you need 'Level Term Insurance'.
The outstanding value of a mortgage is not affected by inflation so there's no need to index-link your policy.
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