Have you considered how your partner and family would cover mortgage payments in the event of your untimely death?
Life insurance offers a very interesting way of covering mortgage liabilities in the event that you were to die. It isn’t a very easy subject to discuss but leaving your family with a significant mortgage liability, and reduced income does not bear thinking about.
Life insurance isn't always essential when taking out a mortgage, but it can provide a safety net if you were to die before it was paid off. Decreasing term insurance covers the cost of the mortgage, decreasing as it is paid off.
Over the years, especially in light of the disappointing performance of endowment annuities, many people are now looking towards life insurance as a means of providing for their family in the event of their death.
Whether considering whole of life policies or term insurance, there are numerous flexible options available today which allow you to look after your family going forward.
Continue reading to get all the nitty-gritty details so you can understand why it is so important to have life insurance.
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Many people automatically assume that life insurance is a statutory requirement when taking out a mortgage. It isn’t. Whether or not life insurance is something you should consider when taking out a mortgage is a whole different question.
As the main income earner or one of the income earners in your household, your death may significantly reduce household income, and your partner may not be able to cover mortgage payments.
Many people look at term life insurance with premiums paid over a period of time during which the policy would payout in the event of your death. This may be the perfect option when looking to provide for your family going forward in the event of your death.
The term of your life insurance would mirror the term of your mortgage. If you were to die, then the life insurance payment would, in theory, cover your outstanding mortgage. This would at least give your partner/family a degree of financial support in the short to medium term.
As we touched on above, term life insurance offers life insurance for a predetermined period of time. In the previous example, the term mirrored the term of the mortgage, and the payout on death ensured the mortgage would be repaid.
It may also be possible to put in place term life insurance which would provide a regular income for your surviving partner until perhaps they had access to their pension pot.
Term life insurance is a very useful way to provide a degree of financial security in the event of your death. The payout could be structured to mirror the mortgage capital to be repaid at the end of your interest-only mortgage.
Therefore, your surviving partner/family would not have the worry of finding income to cover mortgage interest payments as well as the final capital repayment. While the vast majority of mortgages today are capital repayment mortgages, there are still some interest-only mortgages.
A capital repayment mortgage would see your monthly payments go towards interest charges and paying down an element of the mortgage capital. By the end of your mortgage term, the initial capital would be repaid as would all interest charges.
If for example you had a £150,000 mortgage with a 25-year term and took out a £150,000 term life insurance policy you would effectively be over-insured as the initial capital is repaid month by month. Therefore, it would be sensible to consider a decreasing term life insurance policy.
The initial death payment would equal the outstanding mortgage liability at the time the policy was taken out, but this would reduce in line with future mortgage capital repayments. As a consequence of the decreasing liability for the insurance company, your premiums would also reduce in line with the decreasing payment on death.
If you are named as a beneficiary on a life insurance policy, you would need to provide policy details and a death certificate to the insurance company to secure a payout. The production of a death certificate is a legal obligation when someone dies, and you should be given a copy for your records. The process is relatively simple and straightforward.
If you are named as a beneficiary on a life insurance policy, you should receive payment fairly quickly once you have provided policy details and a certified copy of the death certificate. Life insurance companies are well aware that the death of a partner or family member can have serious consequences for short-term cash flow and finances.
Indeed, in some situations, the surviving partner/family member may struggle to cover mortgage repayments, and the family home could potentially be at risk.
The simple answer is, no. If an individual was insured for £150,000 in the event of their death, then the beneficiary would receive the amount in full. Normally there is no income tax or capital gains tax liability, with the majority of life insurance policies “written in trust”.
This ensures that they are considered a separate entity from the deceased’s estate. There may be occasions where life insurance payments are made into a trust which could create tax liabilities. If you are uncertain, it would be sensible to take professional advice.
Once payment has been made from a life insurance policy, as a consequence of the holder’s death, then the policy is terminated. There is nothing for any of the beneficiaries to do as the policy will automatically be closed by the life insurance company.
Life insurance can cost anything from just a few pounds a month to over £100 a month and beyond. If you are unsure about the type and the level of life insurance you require, then it is sensible to take advice. There are many options, and it is essential that you choose the option which best fits your financial/personal scenario.
The Internet is a hive of information, although unfortunately, you will come across an array of misleading advice. There is nothing wrong with using the Internet to give yourself some background on the idea of life insurance and mortgages, but when seeking the right policy, you should consider taking professional financial advice.
Life insurance companies and life insurance brokers are heavily regulated; therefore, in the event of any issues, there are various options open to you. You are protected!
There is a general misconception that because an independent insurance broker has access to the “whole market”, they will always be more competitive than a tied insurance broker. While this may well be the case with some insurance brokers, in reality, even independent insurance brokers have closer relationships with some parties than others.
When considering the position of a tied insurance broker, restricted to a select number of parties they can use, it is worth remembering the potentially huge flow of business they can provide.
Therefore, it is not beyond the realms of possibility that a tied insurance broker could be able to negotiate attractive terms, on a par or even better than their independent counterparts.
This has been a serious bone of contention over the years, commission and fees, some of which have historically not been transparent. Thankfully, insurance brokers are now obliged to disclose their relationship with insurance companies and any commission they earn. There are two ways in which an insurance broker can charge a customer:-
As everything is now transparent and out in the open, it is easier to compare and contrast the fees charged by different insurance brokers. These charges will vary (there is no real standard rate) but you need to balance the quality of the service with the cost.
Life insurance is a very popular way of protecting against mortgage debt left behind in the event of the death of a partner. Interestingly, it may be possible to adjust your existing life insurance policy as your circumstances change in the future.
For example, you may start a family, require a larger home, see an improvement in your financial situation and boost to your earnings. Some people choose to take out an additional life insurance policy to cover above and beyond their existing cover.
Yes. Unfortunately, many people consider insurance policies and general finances as two separate entities. The reality is that they are both interconnected in many different ways and should, therefore, be considered together. As we touched on above, there may be scope to increase your life cover if your situation changes.
You may need to reduce your life cover if the premiums are proving difficult. These are very straightforward issues that you can address during your annual financial review and make adjustments where required.
Unfortunately, we have seen scenarios where individuals have been involved in accidents with their life insurance beneficiaries. This can complicate the payment process. As a consequence, many people look to secure second beneficiaries who will only become eligible to receive payments if the original beneficiary has died.
This could be an extended family member/friend or even somebody who has agreed to look after the funds on behalf of your children. Again, this is a very complicated area of the life insurance market where professional advice is required.
We hope that we have managed to explain the importance of life insurance when taking out a mortgage both today and going forward. We all want to provide for our family in the event of our untimely death, and life insurance policies can remove much of the financial stress in the immediate aftermath.
Life insurance should be considered in tandem with your overall investments and general finances as it is important, although often overlooked, element.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Life Insurance brokers. They have already helped thousands of people get the best Life Insurance cover and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.
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