The premature death of a mortgage holder can cause severe financial hardship to those left behind. However, loved ones can be protected financially by ‘Mortgage Protection Plans’. These are life assurance policies taken out to cover against the death of a mortgage holder.
Mortgage protection plans are simply low-cost basic life assurance protection policies.
The policies pay out a lump sum, which gradually reduces over a period of time, matching the mortgage debt reduction. This means that all of the remaining mortgage at the time of the death can be fully paid off.
The low cost is due to the payout and liability to the insurance company reducing over time. In the early years, when the death payout would be highest, you are generally healthier and less likely to die. The risk of paying out large sums is therefore reduced.
The benefits are paid by the insurance company to either the estate or to the beneficiaries of the person who has died. The ‘estate’ is everything they owned and leave behind when they die. The ‘beneficiaries’ are those entitled to someone’s estate, whether a Will has been left or not. The benefits are primarily designed to allow the spouse or dependants to pay off the outstanding mortgage. They can then continue to live in the home with no further mortgage payments.
Policies can also be arranged in joint names and would then pay out on the first death during the mortgage term. The benefit would go straight to the surviving partner, not the estate of the deceased person.
Critical Insurance Cover
It is also possible to add ‘critical illness’ protection to such plans. The plan would then pay out the sum insured upon diagnosis of the plan holder suffering a serious illness. These include heart attacks, cancer, a stroke, kidney failure, heart bypass surgery, coma, total permanent disability and a range of other serious conditions.
Monthly premiums are usually fixed from outset for the life of the plan. These consider the health and circumstances of the applicant, as well as the amount and duration of the mortgage. The premiums can be affected by poor health, lifestyle factors (e.g. smoking or being overweight) and occupation or hobbies.
The interest rate to be charged on the mortgage is also important. The plans usually guarantee to pay off the outstanding amount as long as a certain interest rate is not exceeded during the life of the loan. If it is exceeded, a review may be required.
You may need other cover
Mortgage protection plans can provide simple protection in case of premature death or critical illness for the outstanding mortgage amount. This is usually most people’s largest monthly financial expense. However, they should not be considered as adequate protection for all of your circumstances, and other types of cover may also be needed. This is particularity true for couples and those with children or families to protect.
We will review your insurance needs as part of the mortgage advice process. We can then make recommendations to meet your needs and your budget for life cover.
THE PLAN WILL HAVE NO CASH IN VALUE AT ANY TIME AND WILL CEASE AT THE END OF THE TERM. IF PREMIUMS ARE NOT MAINTAINED, THEN COVER WILL LAPSE.