Decreasing Term Life Insurance cover amount less than mortgage?

Rusty14

My first home I bought on a shared equity scheme and took out decreasing term life insurance to cover my mortgage and level term insurance to cover the 40% shared equity.

I've since moved house, and took out a much higher mortgage (twice as much as my original mortgage when I started it) and no longer on shared equity scheme.

My mortgage advisor did recommend both life insurance and income protection policies to replace the current policies, but I was too stressed with everything else to really think about it properly so I didn't do anything and am still paying for my old policies.

I do plan to change it, but should I die or have a critical illness in that time, obviously it won't pay out the full amount to cover my new mortgage as it was never set up to cover that amount, but will decreasing term policies still payout whatever proportionate amount is left on the remaining term? And will I get the full level term cover regardless? Or will they both be completely redundant and I'm paying for nothing?

Weighty1

They are not redundant.

The level term cover will always pay out the fixed amount, whether you die on day 1 of the plan or the last day.

The decreasing cover is not set to decrease based on an imaginary mortgage, often calculated with an interest of 8%. Even if you didn't have a mortgage at all the cover would still reduce based on this imaginary mortgage with a 8% interest rate (some companies use higher %'s, some lower).

sal_III

Your life insurance is completely disconnected from your mortgage and the fact you have change your mortgage and property has zero bearing on how much it will pay out. The payment is specified in your insurance policy. The insurance payout doesn't automatically goes towards your mortgage balance, it will become part of your state to be distributed as per your will or the rules of intestacy. Whether the recipients will use it to payout the mortgage or not is up to them.

There is no legal requirement to have life insurance for the full amount of your outstanding mortgage. It's just a general "best practice" to ensure your dependants are not worse off financially in the event of your death.