The difference between life insurance and mortgage life insurance
Both life insurance and mortgage life insurance are designed to pay out a cash sum if you die within the length of your policy. Both types of insurance can be used to help your loved ones pay off the mortgage.
Life insurance vs mortgage life insurance
The main difference between life insurance and mortgage life insurance is that they are designed with different protection purposes in mind. Some people want a policy that would protect their family financially in a range of ways – from education costs to household bills – if they were to die during the policy term. Others may have a need for a policy that would simply help their family pay towards their mortgage protection should the worst happen.
Everyone’s circumstances are different, so you should take the time to consider the various options available. We’ve outlined the policies we offer below, along with what they are designed to help you protect.
Life Insurance (sometimes referred to as level cover life insurance) could pay out a cash sum on your death during the length of the policy. It could be used to help protect your family’s lifestyle and everyday living expenses or to help pay towards an interest only mortgage. The premiums and the amount of cover you choose remain the same, unless you alter your policy.
Decreasing life insurance (sometimes referred to as ‘decreasing mortgage life insurance’) is designed to help protect a repayment mortgage, so the amount of cover reduces roughly in line with the way a repayment mortgage decreases.
Just remember that life insurance is not a savings or investment product and has no cash value unless a valid claim is made.
For the purpose of the rest of this article, when talking about 'mortgage life insurance' we are referring to 'decreasing mortgage life insurance'.
How does life insurance for a mortgage payout?
A fundamental difference between life insurance and mortgage life insurance is how the amount of cover works during the length of the policy.
Life insurance means your amount of cover will stay the same regardless of when a valid claim is made during the policy term.
In contrast, the potential payout from mortgage life insurance to cover a repayment mortgage reduces over time. So while a valid claim from a mortgage protection policy can lead to a payout, it will likely be a lower sum compared to a level term policy, if the original cover amount was the same.
Pros and cons of mortgage life insurance
Mortgage life insurance isn’t for everyone. Life insurance isn’t just for homeowners, so you may want to consider a standard life insurance policy if you rent or have an interest only mortgage. And some people with other life costs (such as a child’s education or hobbies) may prefer a life insurance policy, where they could meet these other costs and have the certainty of knowing exactly how much a payout would generate.
However, taking out mortgage protection life insurance can have its benefits:
- It works for you. The policy can be tailored to your needs. You choose the amount of cover you need to match your mortgage amount and you choose the number of years you need the cover for. It can be taken in joint or single names.
- It’s cost-effective. With mortgage life insurance, you lessen your chances of over-paying for life insurance. Once your mortgage is paid off, you may feel you have less of a need for life cover, so insurance for a mortgage can protect what you actually need.
- It’s cheaper. Decreasing mortgage protection is often cheaper than other types of life insurance, as we’ll explore next.
Is mortgage life insurance cheaper than level term life insurance?
Yes, mortgage life insurance is typically cheaper than a life insurance. This is because the amount of cover decreases over time so the potential payout is less than life insurance, which is fixed. However, there are many factors that determine life insurance premiums – and whether you can get a policy at all – including your age, overall health, smoker status and alcohol consumption.
Which life insurance policy is right for me?
When deciding on what type of life insurance policy you may need, it could help to think about who and what you are trying to protect. If you have children, for example, you may have a wider set of outgoings to protect than just the mortgage, and so a level cover life insurance policy may give you the breadth of cover you require. However, a ‘decreasing’ life insurance policy for mortgage protection can be an affordable and attractive option if you’re looking to keep monthly costs down and you have a repayment mortgage. Every household has different needs, but a good rule of thumb is that if someone else relies on your income – whether that’s a partner, children or another family member – you may want to consider life insurance of some kind.
Are there other life insurance options?
Yes. While we’ve been comparing the differences between life insurance and mortgage life insurance, there are other policies that can protect you and your loved ones:
- 'Whole of life' insurance – unlike a life insurance policy term, this provides indefinite cover for the rest of the insured person’s life and is therefore a more expensive option.
- Increasing life insurance – a lesser known type of life insurance, this type of policy is designed to protect against inflation and the amount of cover and premiums can increase each year. So you may pay higher premiums but the potential payout rises to counteract rising inflation and the cost of living.
You should speak to your financial adviser if you need help choosing the best policy for your needs.
Regardless of what type of policy you chose, taking out a policy can help provide financial security to your loved ones should the worst happen.