The demand for mortgage life cover is likely to come from your mortgage lender. Indeed, it is often made a condition of the mortgage advance that the borrower has sufficient life insurance in place to cover the mortgage. What does this mean in practice?
Why is it demanded?
When advancing a loan that is the size of the average mortgage, the lender is assuming a considerable risk - the risk that the money lent might not be repaid. Although there are many reasons why borrowers might default on their mortgage repayments, a very real difficulty is presented to the lender if the borrower dies before the maturity of the mortgage.
The idea behind life mortgage cover, therefore, is that, as a borrower, you take out a term life insurance, with the insurance term set to coincide with the term of the mortgage, and an insured amount equivalent to the outstanding balance of the mortgage.
How does it work?
If you die before the mortgage is fully repaid, therefore, the life insurance company pays out a benefit that is equal to the outstanding mortgage balance and the debt is paid off. The lender gets his money back and your family or dependants enjoy the security of continuing to live in the home which is now mortgage-free.
This kind of term life insurance even works with respect to standard repayment type mortgages. With these, of course, the amount outstanding to the mortgage lender decreases with each successive year, until it has reached zero at the end of the mortgage term. For these purposes, therefore, a decreasing term life insurance has been developed in which the insured sum payable on the policy holder's death decreases by a given amount with each passing year - so conveniently matching the rate at which the outstanding mortgage debt is also diminishing.
All in the lender's favour?
Some people might think that because mortgage life cover has been insisted upon by the mortgage lender, then it is something solely for the benefit of the lender.
As we have seen, it is certainly in the mortgage lender's interest to require an adequate level of life cover on the borrower's part.
However, it is also a considerable value to the borrower him or herself. If you have a mortgage and were to die before the debt is repaid, for instance, how might your family or dependants cope? Do you seriously expect that an alternative breadwinner from amongst your dependants might be able to step up to the plate and assume responsibility for the mortgage? Unless that is the case, of course, then mortgage life cover offers one of the few ways in which the roof over your family's head might be saved.
There is one form of insurance that does protect the mortgage lender alone, however, and that is mortgage indemnity insurance. It should not be confused with mortgage life cover. Mortgage indemnity insurance is a safeguard some lenders apply in the case of certain borrowers where there is a perceived higher than normal risk of repayments falling into arrears or default. The insurance ensures that the lender nevertheless recovers the outstanding balance of the mortgage. Even so, it is the borrower who pays the premiums for the lender's protection.
David Thomson is Chief Executive of BestDealInsurance a completely independent specialist broker dedicated to providing their clients with the best insurance deal.
They offer great value life insurance as well as, critical illness and income protection, ensuring that their clients have the protection they need, without leaving a hole in their pocket.
Why is it demanded?
When advancing a loan that is the size of the average mortgage, the lender is assuming a considerable risk - the risk that the money lent might not be repaid. Although there are many reasons why borrowers might default on their mortgage repayments, a very real difficulty is presented to the lender if the borrower dies before the maturity of the mortgage.
The idea behind life mortgage cover, therefore, is that, as a borrower, you take out a term life insurance, with the insurance term set to coincide with the term of the mortgage, and an insured amount equivalent to the outstanding balance of the mortgage.
How does it work?
If you die before the mortgage is fully repaid, therefore, the life insurance company pays out a benefit that is equal to the outstanding mortgage balance and the debt is paid off. The lender gets his money back and your family or dependants enjoy the security of continuing to live in the home which is now mortgage-free.
This kind of term life insurance even works with respect to standard repayment type mortgages. With these, of course, the amount outstanding to the mortgage lender decreases with each successive year, until it has reached zero at the end of the mortgage term. For these purposes, therefore, a decreasing term life insurance has been developed in which the insured sum payable on the policy holder's death decreases by a given amount with each passing year - so conveniently matching the rate at which the outstanding mortgage debt is also diminishing.
All in the lender's favour?
Some people might think that because mortgage life cover has been insisted upon by the mortgage lender, then it is something solely for the benefit of the lender.
As we have seen, it is certainly in the mortgage lender's interest to require an adequate level of life cover on the borrower's part.
However, it is also a considerable value to the borrower him or herself. If you have a mortgage and were to die before the debt is repaid, for instance, how might your family or dependants cope? Do you seriously expect that an alternative breadwinner from amongst your dependants might be able to step up to the plate and assume responsibility for the mortgage? Unless that is the case, of course, then mortgage life cover offers one of the few ways in which the roof over your family's head might be saved.
There is one form of insurance that does protect the mortgage lender alone, however, and that is mortgage indemnity insurance. It should not be confused with mortgage life cover. Mortgage indemnity insurance is a safeguard some lenders apply in the case of certain borrowers where there is a perceived higher than normal risk of repayments falling into arrears or default. The insurance ensures that the lender nevertheless recovers the outstanding balance of the mortgage. Even so, it is the borrower who pays the premiums for the lender's protection.
David Thomson is Chief Executive of BestDealInsurance a completely independent specialist broker dedicated to providing their clients with the best insurance deal.
They offer great value life insurance as well as, critical illness and income protection, ensuring that their clients have the protection they need, without leaving a hole in their pocket.