This article was written by the award-winning life insurance broker, Reassured.
Protect your family home & loved ones with life insurance
Okay, so these are extremely difficult questions to ask, but we believe very important ones to answer – what if the worst were to happen and you or your partner were no longer around?
Would you be able to:
- Afford the monthly mortgage repayments?
(Average UK mortgage debt is £121,687 – source: themoneycharity.org.uk)
- Pay ongoing household bills?
(Water, gas, electricity, council tax)
- Maintain your current standard of living?
(Would you have to downsize, causing more family disruption)
- Would you need to return to work in order to meet living costs?
- If you have children who would look after them if you returned to work?
- Could you afford expensive childcare/nursery fees?
(Average cost of full-time childcare in the UK is £223.36 a week per child – source: themoneycharity.org.uk)
Taking out a life insurance policy can provide answers to all these tough questions, providing peace of mind for you and your loved ones.
For most, a mortgage is the largest debt that we’ll ever incur. Therefore, it makes sense that we protect it.
However, life insurance is not compulsory and so it’s up to the individual to ask ourselves these questions and provision for the future.
But, what’s the most effective way of protecting your family home, so not to burden your loved ones with a crippling debt?
Many find life insurance and the industry jargon confusing:
- What is the difference between decreasing and level term cover?
- What is the difference in cost between decreasing and level term premiums?
- Will my policy definitely pay out at some point?
- Should I get a joint policy with my partner or two single policies?
Decreasing term vs level term?
When it comes to taking out life insurance to protect a family home you have two main options; decreasing term or level term cover.
Decreasing term cover, sometimes referred to as ‘mortgage life insurance‘, is the most common and cost-effective method of protecting your mortgage.
It’s designed to help protect a repayment mortgage. The size of the pay out reduces over time in line with your mortgage debt.
This means your loved ones could receive enough funds to clear the mortgage. However, there would not be funds left over to provide an inheritance or fund on-going family living costs.
In contrast, a level term policy pay out remains fixed throughout. So, regardless of whether you pass away at the start or the end of the policy, your beneficiaries would receive a fixed lump sum.
Both these options are term-based policies. Which means cover only lasts for a set period and the policy has a defined start and end date. As a result, it’s possible to outlive your policy and not receive a benefit.
The price of your premium
No one ever wants to pay more than they have to, especially on something like life insurance premiums.
Generally speaking, level term premiums, which provide greater protection, are approximately 20% more expensive compared to decreasing term premiums.
With decreasing term cover the financial risk to the insurer reduces over time, which helps keep monthly premiums lower.
It’s important to remember that there are many different factors which impact the cost of premiums, such as your:
- Current health
- Family medical history
- Alcohol intake
- The length of the term
- The size of the required pay out
- Your occupation / hobbies
- Whether you smoke.
Although most of us only consider taking out life insurance after a major life event, such as the birth of a child, the purchase of a property or the passing of a family member, the time to secure the most cover for the least amount of money is to take out a policy while you’re young and healthy. This enables you to lock in very low premiums for a period of time.
The term length
To fully protect your family home, it makes sense that your life insurance cover aligns with the length of your mortgage term.
However, if you have other reasons for requiring life cover, like meeting future living costs or to leave an inheritance, you may want the cover to exceed your mortgage length.
If you have kids then you’ll also want to make sure cover lasts until they’re financially independent or left university.
Do you have children or dependents?
This is a big one. Whether you have children or not is highly likely to affect the type of life insurance you decide to take out.
If you don’t have any dependents and only need to cover the mortgage, then decreasing term may provide sufficient coverage.
However, if you have children who reply on your financially and wish to leave an additional lump sum, as well as cover the mortgage, then level term may be better suited.
Joint policy or two single policies?
You have the option of taking out either a joint policy with your partner, or two single policies.
The main benefit of a joint policy is that you only pay one monthly premium and therefore it works out cheaper.
However, it is important to understand that a joint policy only ever pays out once, (usually on first death). Thereafter the policy expires, leaving the remaining party to sort out a new policy when they’re that bit older, (thus premiums are dearer).
In contrast, if you take out two individual policies, although you’ll have to pay two monthly premiums, you’ll effectively double your level of protection and your loved ones could benefit from two separate pay outs.
In fact, the saving by taking out a joint policy is usually pretty minimum, so in most circumstances we would recommend two single policies.
There’s no right or wrong way to protect your family home and it’s a case of finding the right life insurance to meet your specific needs.
From our experience at Reassured, many homeowners take out the first quote they come across, often through either through their mortgage lender or via their preferred insurer.
However, we believe the best way to secure the right policy, for the right price, is to shop around and compare multiple quotes.
You could do this yourself online, or you could save yourself time and money and ask a broker to do it on your behalf.
Ultimately, the most important thing is to make sure that you have sufficient cover in place.
If you don’t have life insurance cover, why not start comparing quotes today. Cover could be acquired for as little as 20p a day.
Freeing you up to get on with enjoying your life, safe in the knowledge your loved ones’ financial future is secure.