Mortgage life insurance

RexItaliae

Hi all, I'm a first time buyer, currently fairly ahead in the purchasing process (mortgage and survey done, waiting for answers to enquiries and for searches to come back), and I'm looking into a mortgage life insurance. I want to go for a decreased term insurance, because all I want is for my repayment mortgage to be cleared out in full should I die before I finish paying it off. The mortgage is in my name only. I have a few questions for which I could not find a clear answer online:

1. I will insure myself for the full value of the mortgage and for its full term (35 years) at guaranteed premiums, so the amount I'll pay per month won't change. However, I plan to substantially overpay my mortgage and to reduce the term accordingly (if the bank will allow that), so the question is: what happens if I clear the mortgage in, say, 20 years instead of 35? Should I get a new quote for the insurance every year or so, to see if with the up-to-date balance and term I can save on premiums?

2. I don't quite understand how this kind of insurance works. If I die and my heirs make a claim, will they actually receive a certain amount in their bank account and then they're free to do whatever they want with it, or are they actually forced to spend it to pay off the mortgage? (I'm foreign myself so I'm not totally sure how these things work in the UK. I'm resident in England though.)

3. I can see from the preliminary documents that the insurance I'd like to take will assume an interest rate of 7.0% of my mortgage. If I die before paying off, does that mean that the insurance company will pay back whatever would be the outstanding balance of a mortgage for the initial amount I've declared to be repaid in 35 years at 7.0% interest rate, at the time of the claim? Therefore in fact they might end up paying more than what I'll actually have outstanding if I'll always stay below that interest rate? Or will they always exactly match the outstanding balance of my mortgage, as long as my interest rate stays below 7.0% on average?

4. If I write the policy in trust, can the trustee be a foreign person resident abroad? What happens if the trustee dies before me?

5. When should I actually apply for this insurance? The day I exchange? On completion? In between?

DullGreyGuy

1. This ultimately is simply life insurance, its designed to reduce the sum insured approximately inline with the mortgage but if a claim happens you/your heir simply gets the lump sum and can use it to clear the mortgage or go on a holiday. Most people won't get new quotes for life insurance after overpaying and instead just make a judgement call when the mortgage is paid off if it's worth continuing the insurance or cancelling it. Many people are underinsured and so probably a fair proportion just keep it going, especially if it doesn't include Critical Illness and so premiums are tiny. No harm in getting new quotes, your under no obligation to accept them but probably after doing it a few years and seeing its not saving you anything you may get bored of doing it every year/every few years

2. As above, use it as you want.

3. As above, it will payout whatever the sum insured is. It's not actually linked to the mortgage and so may be above or below the mortgage depending on over payments, interest rates, penalties, product fees etc

4. Trusts aren't my area of expertise but ultimately they manage the trust, so if its a discretionary trust they'll decide who its to the benefit of, following your wishes or trying to second guess your wishes should your wishes not be possible (eg beneficiary is already deceased). Ideally you'd have more than one trustee and would update the trust if one of them died

5. Depending on medical conditions and if it's just Life or Life & CI or Income Protection etc it can take a while to get insurance fully in place. So it depends on how risk adverse you are... full belt and braces is getting it fully underwritten before exchange and sign as soon as you have exchanged. Others will start the search process after completion and accept the risk for a few weeks/couple of months were you to be hit by the proverbial bus.