Many of us will think about life insurance for the first time when we buy our first home. When giving out mortgages, many lenders require that life insurance be taken out. This is to make sure that the loan will be paid back if the borrower dies. Even if this isn't the case, it is smart to do so if you have a partner or family who would be hurt if you died and they couldn't use your income to help pay the mortgage each month.
This year, Sainsbury's Bank warned that up to 4.2 million people who have a mortgage do not have life assurance. This adds up to about GBP217 billion worth of mortgages that don't have life insurance.
There are many kinds of life insurance. Cost depends on a lot of things, like how much is covered, how long it lasts, if you smoke or not, and your general health. Prices for monthly premiums can vary from provider to provider, so it's a good idea to shop around. But when you're comparing prices, you should keep in mind that the amount could go up after you've filled out the application.
The most common type of life insurance that goes with a mortgage is term life insurance. Term assurance gives the life assured a lump sum if they die within a certain time. If this doesn't happen, the policy doesn't pay out any money.
Most of the time, decreasing term life insurance costs the least. The amount guaranteed goes down by the amount of mortgage payments that are still due. This works for a mortgage where you pay both the interest and the principal. At the end of the mortgage term, you pay off the principal.
With level term life assurance, the amount you get when you die stays the same. This works for a mortgage where the amount of money still owed on the principal doesn't go down over the course of the loan.
A common extra benefit that can be added to a life assurance policy is critical illness cover. When a critical illness like:
Cancer
A heart attack
Multiple sclerosis
Stroke.
If you choose this option, you should find out exactly what is covered, as this can vary a lot between providers.
