Mortgage Life Insurance - Which Type Is Best?
By Chris Johns
Mortgage life insurance protects your home and your family by providing a lump sum to pay off your mortgage should you die while the policy is in force.

There are two types of mortgage life cover - level term and decreasing term insurance.

With level term mortgage life insurance, the value of your policy (the amount you're insured for) remains the same for as long as the policy is in effect. With decreasing term mortgage life insurance, on the other hand, the value of the policy decreases in line with the reducing balance of your mortgage loan.

The cost of this type of insurance depends on how large your mortgage is, the term of the mortgage, the type of insurance you buy, and your physical health. Regardless of which kind you choose, the policy terminates when the mortgage is paid in full, or when a claim is made.

So Which Type is Best?

When considering what type of mortgage life insurance you need, your main consideration will be the type of mortgage you have and the cost. This is where decreasing term insurance can be an advantage as it's almost always less expensive than level term insurance (assuming all other factors are equal). If you have a Repayment or Capital and Interest mortgage, the amount you can claim for on a decreasing term policy reduces in line with your outstanding mortgage loan. As the risk to the insurance company reduces over time this is reflected in lower premiums.

Whilst level term mortgage life insurance is more expensive; there are a couple of big advantages that make it more suitable in some circumstances. Level term insurance is of particular advantage in the later stages of your mortgage, because you're still insured for the original mortgage amount even when you've paid most of it off. That means if your family must make a claim, there is enough money to pay the mortgage, and there's some left over, too.

Level term insurance is also more appropriate for those with an interest-only mortgage. With an interest-only mortgage, the amount you owe stays the same for the full term of the mortgage as you only pay interest on the debt. Therefore, you need life cover to equal or exceed the debt for as long as it exists.

Joint or Separate Policies?

If you and your spouse are joint owners of the mortgage, you'll both need to take out mortgage life insurance policies. The question then becomes whether it's better to get a single joint policy or two separate ones. Again, the cheapest option may prove attractive but there are other considerations.

The big problem with a joint policy is that it only pays out once. If one spouse dies or becomes terminally ill and a claim is made, the policy terminates

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with the surviving spouse left uninsured. This may not be a problem if there are no children involved, however for families, this can be an issue. Insurance is always less expensive when you're young, and the surviving spouse may find that getting a new life insurance policy is very expensive. If the surviving policyholder continues to have financial dependants such as children, it is almost always better to get two separate policies, to ensure that the entire family remains protected even if one spouse dies.

As always, if you have any doubts about which type of cover is best suited to your needs and mortgage, consult a regulated financial adviser for specific advice.