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What Kind of Life Insurance?
Most of us have a mortgage, and it is likely that this constitutes the most important financial investment we will ever undertake. Because it is such a large sum of money, it makes sense to protect that investment because it is essentially a debt secured on your house. In the event of default, you lose your house and the roof over your head.
Of course, if you have a family, you will be keen to ensure that they are provided for should the unexpected occur, and the main risk is that you die leaving your estate to pay the mortgage – if this is possible. Life insurance mitigates against the risk that your family get caught short when you die, and in this respect there are two principal types of life insurance: level term and decreasing term. There are advantages and disadvantages to both and these are outlined below.
Level term life insurance is the more expensive option of the two, but it has a distinct advantage over decreasing term in that the amount insured remains the same whatever the point in time you are at. For example, if you died at the start of your mortgage term, your estate would get a payout of your mortgage amount – say £150,000, and if you died towards the end of the term, you estate would also get £150,000. You pay as would be expected, a monthly premium to the insurer. It can be seen therefore that this is the best option to go for if it is likely you will have other, for example, unsecured debts on credit cards or car finance to repay – the longer you have subscribed to that policy, the more that will be available to cover these costs – and there may of course be a little left over for your family as a handy cash sum.
Conversely, decreasing term life insurance is structured such that while arguably the cheaper option, outstanding mortgage liability as a function of time, so if you owed £75,000 of that £150,000 mortgage above at the time of your death, you would only receive the £75,000 with no extra funds left overfor other financial obligations.
As has been shown, there are a number of things to consider when taking out life insurance, and you should weigh up the benefits and demerits of each type carefully. When the time comes, always use a reputable firm with a longstanding reputation. The ABI(Association of British Insurers) website is a good source of unbiased, dependable life insurance information.
Last updated 14 June 2012