What is it?
Borrowers taking out an annuity or repayment type mortgage on their homes, will be required by the lender to take out a life assurance policy. The usual type of policy taken out is a mortgage protection policy.
This type of policy is a reducing term policy and does not have any encashment value. The cover ceases at the end of the term of the policy.
How Does This Type of Policy Differ From Term Assurance?
At the start of the term, the mortgage protection policy will provide a death benefit of at least the mortgage balance. The protection cover will reduce over time, similar to the repayment of the mortgage. The purpose of the policy is to pay the mortgage balance in the case of premature death. In this way the surviving dependants can continue to live in the family home without fear of the lending institution requiring the sale of the family home to pay off the remaining mortgage balance.
The policy is set at the start of the term with an assumed mortgage interest rate. This rate is the expected mortgage interest rate over the lifetime of the mortgage. There should be no expectation that there would be any funds left over from the policy payout, after repayment of the mortgage balance.
A term policy should be taken out for the provision of replacement income in case of premature death.
What Term Should I Choose?
The minimum term chosen, should be sufficient to cover the period when you are repaying your mortgage.
How Much Does it Cost?
Premiums typically depend on the age, smoking status, duration of the term and health of the individual. But premiums will be lower than a level term assurance policy, as benefits reduce over time. As the benefits of a mortgage protection policy are unlikely to differ between providers, the policy offering the lowest premiums is the one that is typically chosen.