If you are buying your first home, there are a multitude of weird and wonderful questions that spring up during the process. One such query is, Do you need life insurance when buying a house?
Today’s post is going to answer that for you, and give you a little bit more mortgage protection information besides.
What is mortgage life insurance?
In the simplest of terms, mortgage life insurance - often also referred to as Mortgage Protection - is a policy that protects your loved ones from financial burden should you pass away. Cheery stuff!
It’s important to bear in mind that there are dozens of life insurance products out there and that mortgage life insurance is pretty specific. Other life insurance policies may or may not already cover any mortgage you may have now or in the future by way of the lump sum your beneficiaries receive, so check the cover before you essentially duplicate an existing policy.
Do you need life insurance when buying a house?
To the big question, then.
From a legal standpoint, the answer is a clear and unequivocal ‘No’. However, while there’s no legal obligation for you to have mortgage protection in place to buy property, some lenders will want you to have a mortgage life insurance policy set up before you move into your new home.
Where this becomes a little sticky is that said lenders are often quite pushy in terms of up-selling policies provided by themselves or an affiliated insurance company. Don’t be bullied into selecting the policy suggested by your lender, as you may be able to get a better deal elsewhere. Shop around first.
Do you need any insurance policies when buying property?
While life insurance isn’t a legal obligation when buying property, buildings insurance is definitely something your lender will want you to have in place before they’ll release any money.
All lenders are worried about is that the value of the home is protected. They will want to be certain the property’s value never drops below the amount you borrowed due to structural damage, so buildings insurance makes sense from their point of view.
Obviously, other things can happen to affect property prices, but covering things like fire and flood will ensure the lender is protected against repairable decreases.
So, should I get mortgage protection or not?
Despite there being no legal obligation to have it, there are plenty of instances where mortgage protection makes sense, namely for those who have dependants who rely on their income to pay the mortgage. For those without dependants, however, life insurance mortgage protection may not be necessary.
Remember, too, that any existing life insurance policies you have may already cover your outstanding mortgage balance should the worst happen, so do check before you take out another policy. It’s also worth looking at the duration of the policy as well, to ensure that it outlasts the mortgage term you have in place, too.
Are there different types of mortgage life insurance policies?
As one would expect, there are lots of different mortgage life insurance products on the market offered up by dozens of different providers. Despite there being a plethora of policies to choose from, they can pretty much be narrowed down into two categories: Decreasing Term and Level Term.
Of the two, decreasing term life insurance for mortgages is the one most homeowners opt for. The reason for this is simple, it’s cheaper than taking out a level term policy.
Decreasing term mortgage protection does what it says on the tin: the amount paid out decreases to stay in step with your outstanding mortgage balance. Unfortunately, your monthly premium doesn’t decrease with it!
Due to the nature of the policy, decreasing term protection is only really suitable for repayment mortgages.
As one would expect, level term mortgage protection is pretty much the opposite of a decreasing term policy, in that it pays out a fixed lump sum as opposed to moving in line with your outstanding mortgage balance.
This type of policy may suit you and your family better if there are other outstanding debts to be paid, or if you simply want to leave a guaranteed lump sum to your beneficiaries if you die within the policy’s term.
Level term products are also better suited to interest-only mortgages, as they will be able to cover the full amount outstanding on your loan.
Is critical illness mortgage cover worthwhile?
Some mortgage protection policies also include something called Critical Illness Cover, but these products will likely cost you more. Critical illness cover is pretty self-explanatory: it gives you a degree of financial protection should you fall seriously ill without warning. But, is it worth having?
Adding this cover to your life insurance policy is really a matter of personal choice. However, it would be worth considering if you have dependants and little, or no, savings, as it will definitely provide you with peace of mind.
That being said, it’s important to point out that premiums can be expensive and each policy will vary as to what illnesses are covered and their severity. You really need to read the small print when it comes to critical illness cover, so don’t skip this step.
It’s also worth pointing out that many employers may already provide a degree of critical illness cover as part of their employee benefits package. As with life insurance, check what you already have, as there’s no point in paying twice for the same thing.
That’s it for another week. If you’re thinking of buying your first home in or around the capital, speak to Petty’s. We have been making property dreams come true since 1908 and our friendly, experienced team would love to assist you with your move.