Life Insurance

Young Family

 

 

What is mortgage life assurance?

The idea is if you die, it ensures your dependents needn’t worry about repaying the mortgage as policies are designed to pay off the remaining debt on repayment mortgages if you die within a set number of years.

Endowment mortgage holders usually needn’t worry about this as the life assurance is included within the endowment.

Technically, its full name is Mortgage Decreasing Term Life Assurance (MDLA). The reason it is ‘decreasing’ is because your outstanding mortgage debt, and therefore the potential payout, decreases over time.

Don’t confuse it with…

It’s easy to confuse with other similar policies. So here’s a quick list of things it isn’t:

  • Level Term InsuranceThis is bought to provide a lump sum to your family in case you die though it can also be used to cover your mortgage debt too, and is often more efficient if it does.

  • Whole of Life InsuranceThis is an open ended investment based policy mainly used for inheritance tax planning that runs out when you die, rather than after a fixed time.

  • Mortgage Payment Protection InsuranceWhile the name is similar, these policies are designed to pay off your repayments in the event of accident, sickness and unemployment rather than death; though there are some hybrids.

Is it worth having?

Most lenders strongly recommend you get a policy when you take out a mortgage and it isn’t a bad idea. If done correctly, it shouldn’t be prohibitively expensive.

Yet lenders will try and flog you their own ridiculously expensive policies, often without regard to circumstance. For example, if you don’t have anyone to leave your property to and money is tight, then there’s no need.

For many with dependents it’s worth considering the cheapest level term assurance policy instead. At the very least when getting a new quote, see what the price difference is. This is because level term policies pay a fixed amount rather than decreasing sum.

This has two advantages; first it means if you trade up to a bigger house in future you mightn’t need much additional insurance, plus as well as paying off the house it leaves extra money for dependents.

If you’re wanting to provide a regular income for your family, rather than a lump sum, the Family Income Benefit is an alternative. This provides an annual tax free payment for a set period.

Why is it assurance not insurance?

If you are wondering why it is life ‘assurance’ not ‘insurance’, that’s because assurance is for something that is certain to happen, insurance is where there is only a risk of it happening… and death is assured. Though some do call this ‘insurance’ too as there’s no guarantee you’ll die within the term.

The Key Decisions

The cost of a policy will increase with the mortgage size, and the length of your term. Yet just as important is likeliness of your death during the term. This means age, sex and whether you smoke are big factors.

It’s also worth noting prices can change daily, so if you’re comparing a range of companies it’s worth doing all at the same time.

  • The less risk you’ll die, the cheaper

    Some MDLA policies also factor in health, occupation and participation in risky sports. So a 21-year-old, organic food eating, gym addict, who’s alphabetised their vitamin collection, will probably find their policy pretty cheap.

    The fact pricing radically changes depending on who you are leads to an important rule…

    Disclose everything; all past conditions and any risks. If not they can use ‘non-disclosure’ as an excuse not to pay out.

  • Do it as a couple?

    Couples can go for either separate or joint policies which pay out on the first death. However a joint policy would only be suitable if you need to pay out the same amount for both partners. Even if a joint policy does look suitable, it’s worth getting quotes for standalone policies anyway, as it’s often cheaper.

  • Quit smoking or planning to?

    Non-smokers pay a lot less cash than smokers, simply because they’re a lot less likely to die during the term. To count as a ‘non-smoker’ you need to have been genuinely smoke free for at least a year.

    Therefore one year after the date you quit, you should go through this process to get a new deal and you should save enormously. Don’t be tempted to lie though… if you were to die and it was discovered you had been a smoker it could invalidate the policy.

 

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