Guide to Mortgage Protection
Term Assurance
Term Assurance is life cover that provides a lump sum if you die during the policy term, which can help pay off your mortgage. Therefore your family will not have to worry about repayments on your mortgage.
This is the simplest and cheapest type of life insurance, and is known as term insurance because you choose how long you're covered for, say, 10, 15, or 20 years (the term) up to a maximum of 40 years. We offer both level term assurance where the amount of cover remains the same throughout the policy term and decreasing term assurance where the amount of cover decreases in line with the amount of the outstanding mortgage.
Term insurance only pays out if you die within the term you've agreed. If you live longer than the term, you get nothing. As a couple, you can also take out term cover in both your names, with the policy paying out if either of you die during the term.
Things to look out for
- What type of policy do you want? For example,
- family & personal income plan (a policy which pays out a monthly benefit rather than a lump sum),
- increasing policy (policies with indexation, where cover and premiums rise in line with inflation),
- decreasing policy (the cover decreases over the term of the policy)
- Check for exclusions - in other words, when the policy won't pay out. For example, most do not cover death due to alcohol or drug abuse. You might not be covered while taking part in risky sports. If your health is poor when the policy starts, some causes of death might be excluded or you might be refused cover altogether.
- Premiums shown are usually fixed for the whole term. There are also contracts where premiums are reviewable after a certain period, usually five years.
- How flexible is the contract? Can you reduce or increase cover easily as your circumstances change? Are there extra charges for doing this? Does cover stop immediately if you miss a payment or is there a period of grace?
- By paying extra, you can usually include Waiver of Premium. It pays the premiums if you can't work because of incapacity caused by illness or injury so that your cover is not interrupted.
- The policy can be set up under trust. This means that in the event of death, proceeds of the policy are paid directly to dependants of your choice. Provided a trust is set up properly, there may be benefits to doing this. However, using a trust may not be suitable for everyone and because of the complexities we recommend you seek financial and legal advice. Contact us for more information.
What does it cost?
This depends on several factors, such as the amount of cover you want and the length of the term. Naturally, it's also based on the likelihood of your insurer having to pay out: if you're a smoker and do a dangerous job, you'll pay more than a non-smoking office worker. Term life cover also costs more for men because, on average, they don't live as long. Always compare what's covered by a policy, not just the price. Some might be cheaper than others, but they may not offer the same level of protection.
Life insurance plans are not investment products. They have no cash in value at any time. Also, if you stop paying the premiums before the end of your policy, your cover will end after 30 days.
Source: FSA Last Updated March 2009
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