Life insurance is commonly used to protect the outstanding loan on a mortgage. The type of plan used will depend on the type of mortgage you have.

What type of mortgage do you have?

If you have a mortgage where you are repaying both the capital and the interest on the loan every month you have a capital repayment mortgage. With this type of mortgage the outstanding capital on the loan is reducing each month so that by the end of the mortgage term, the loan has been repaid in full.

If your mortgage is set up to repay only the interest every month then you have an interest-only mortgage. With this type of mortgage the outstanding loan stays the same throughout the term of the mortgage.

With this arrangement you would also have an investment savings plan designed to accumulate sufficient capital to repay the loan at the end of the mortgage term and separate life cover.

What type of plan should I use?

Term Assurance

Term Assurance is a "cheap and cheerful" method of providing a relatively large lump sum for a small premium. It can fairly be compared to third party, rather than fully comprehensive car insurance. These policies will provide a specified lump sum only in the event of the death (or specified critical illness) of the life assured during the pre-determined life of the policy. These types of policy never acquire a surrender value; hence they offer a high amount of cover for a comparatively low premium.

If you have a capital repayment mortgage you would normally use a decreasing term life insurance plan. This is one where the sum insured decreases every year in line with the decreasing loan outstanding on the mortgage.

If you have an interest only mortgage you would normally use a level term life insurance plan. This is one where the sum insured stays the same throughout the life of the plan. With both types of plans the cost covers the risk of you dying prematurely and in the event of a claim provides funds to pay off the outstanding loan. When the policy comes to an end it ceases without value.

What additional features are available with term assurance?

The most common additional features are critical illness cover, premium protection, terminal illness and conversion.

Critical illness cover can be added with most company’s plans as an option. In this case the plan will pay out either on death or critical illness. There is an additional cost to this option.

Premium protection or “waiver of premium” is also available and provides for protection of the monthly or annual premium. If you are ill and unable to work the insurance company will pay or “waive” the premium until you return to work.

The benefit can be claimed after a deferred period, normally 6 months. There is an additional cost to this option and will normally depend on your state of health and occupation at the time of application.

Terminal illness cover is now available on most plans as standard and does not involve any additional cost. The benefit can be claimed if you are unlikely to survive a terminal illness for more than 12 months.

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