Mortgage Life Assurance Policy vs Life Assurance Policy

ramzym

My wife and I have 8 years left to pay on our mortgage.

We have a mortgage life cover policy (decreasing term) which we took out at the time of having taking out the mortgage.

Our mortgage has increased now, but the policy has not been updated to cover the increased amount.

We both also have separate Life assurance policies and Death in Services benefit of 4 x salary. The cover we have is ample to pay off any debts and provide security for the surviving spouse and children.

What we would like to ascertain is whether a Life assurance policy can be used as a substitute (instead of a Mortgage life assurance policy) to pay a mortgage off (on death say). Can the proceeds of life assurance be used to pay off all types of debts, including mortgages?

dunstonh

What we would like to ascertain is whether a Life assurance policy can be used as a substitute (instead of a Mortgage life assurance policy) to pay a mortgage off (on death say). Can the proceeds of life assurance be used to pay off all types of debts, including mortgages?

Yes they can. The only one that may not potentially be available to do that is death in service.

The cover we have is ample to pay off any debts and provide security for the surviving spouse and children.

Well done. Its rare to find anyone in that position. Many think they are until they realise the sums you really need to use (which is often around 10 times income as the sum assured and the maximum DIS is 4x).

ramzym

Thanks for the reply.

For arguments sake (just to make sure I understand).

If I have £120k outstanding mortgage, and my life insurance + DIS benefits totals £300k say, my family can use the proceeds of the latter towards paying off the £120k mortgage debt.

Alternatively, I could take out a separate mortgage life assurance policy (decreasing term) for paying off the £120 debt.

hope this makes sense.

dunstonh

If I have £120k outstanding mortgage, and my life insurance + DIS benefits totals £300k say, my family can use the proceeds of the latter towards paying off the £120k mortgage debt.

Yes they can. That will leave £180k for income replacement which would provide around £9,000 income. If those are you approx/real figures then you are perhaps not as well insured as you thought. Your pensions would need to be factored in as well and your personal savings/investments.

Alternatively, I could take out a separate mortgage life assurance policy (decreasing term) for paying off the £120 debt.

Thats what most people do. You separate your family protection from your mortgage protection. Mainly as its usually cheaper to do so and the term you need cover for changes and with house moves etc you dont want to have to keep changing all your plans each time. Just the one linked to the house.

ramzym

I have been getting some quotes on life insurance cover for 120k.

I think I have two options.

1. Take out a joint decreasing mortgage life insurance for 120k.

• Pays out on first death and/or terminal illness benefit.
• The monthly premium is fixed for the 8 years left on the mortgage.
• The benefit decreases each month as the plan progresses to it's 8th year.
• On death or terminal illness the plan pays out to pay off the balance on the mortgage.
• Monthly premium approx £7.40.

2. Take out a joint life insurance for 120k.

• Pays out on first death and/or terminal illness benefit.
• The monthly premium is fixed for the 8 years.
• The benefit remains static throughout the life of the plan.
• On death or terminal illness the plan pays out 120k to the surviving spouse/beneficiary to pay off the mortgage.
• Monthly premium aprox £10.50.

Looking at the options it seems that option 2 is the better one as it pays the full 120k right up till the 8th year of the plan, so if either of us die before the plan terminates, then they would be (120k - balance of mortgage left) better off, where as with option 1 the mortgage would be paid off by the plan, but the surviving spouse would not have anything.

The only thing about option 2 is that it is around £3.00 more per month.

So what's the point of having a decreasing mortgage term policy compared to a normal life insurance policy. Or am I missing the point somewhere?

dunstonh

So what's the point of having a decreasing mortgage term policy compared to a normal life insurance policy. Or am I missing the point somewhere?

You are missing the point. You have a decreasing financial need that finishes at a defined point. So, why pay £3pm more for the whole period for something you dont need?

If you do need increased family protection then get a family income benefit or level term assurance to meet that need. Dont fudge it by trying to use a little left over on the mortgage cover.

ramzym

I have enough family protection but wanted a separate insurance to pay off any outstanding mortgage loan. The extra 3 pounds a month is not an issue for us. We were thinking that should anything happen within the 8 yrs then any outstanding amount from paying off the mortgage balance in option 2 would be a bonus. Of course this depends upon the fact whether one of us dies within the 8 yrs.