Got a mortgage? Why life insurance is a good idea.

The first thing to remember here is that life insurance (along with financial protection in general) is not a condition of a mortgage. In other words, it is not necessary to have life insurance in order to have a mortgage.

This means you can take out a mortgage without any financial protection – but this does not mean that it is not important. It is strongly recommended that customers look to protect themselves and their families in the event of their death or illness. This is especially important if they owe a large sum of money, which they or their family may struggle to repay if they could no longer work or died.

Time for a bit of financial jargon.

So, what is life insurance?

Quite simply, it is a financial product (often referred to as a policy) taken out by someone (known as the policyholder or in most cases, the life assured) who pays a regular amount of money (usually on a monthly basis) known as the premium, to the insurance provider.

As long as the policyholder continues to pay the premium, the policy will pay out a one off, lump sum of money on their death, known as the sum assured. This sum of money can then be used to either pay off a debt (for our purposes, a mortgage) or it can be used for something else. The key point here is that it doesn’t need to be used to pay off the outstanding mortgage.

(Note: some life policies will pay out an agreed amount on an annual basis, instead of a lump sum, as a way of providing an income for a bereaved family. Here though we will focus on those that pay out a one off lump sum.)

There are two main products in the world of life insurance:

• Term insurance and
• Whole of Life cover.

As its name suggests, ‘whole of life’ cover runs continuously from the day it is set up, so long as the premium keeps being paid, until the life assured dies. It will then pay out the sum assured.

A term insurance policy, on the other hand, covers the life assured for a specific number of years, known as the term. When the term ends the policy ends, meaning if the life assured hasn’t died, no sum assured is paid out.

Term insurance is often considered to be the most suitable to cover a mortgage. This is because it is usually less expensive than whole of life cover and can cover the term of the mortgage exactly, rather than for a much longer time, as would be the case of a whole of life policy.

As we are talking about mortgages here, we are only going to focus on term insurance.

There are two main types of term insurance and these are shown in the table below.

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