Mortgage Life Insurance - again

thriftylassy

Hello, 
I've been researching a lot about the mortgage life insurance, the decreasing type, to insure our joint mortage.
There is one aspect that I can't quite get my head around and it is the inheritance tax implication. As I understand it, on the event of the death of one of the policyholders, the bank will pay out a sum to cover the existing mortge. But this sum will also be subject to Inheritance Tax and will make part of the deceased's estate. 
When we apply for the insurance they ask us a simple question - how much is your mortgage and how many years have you got left on it. 
What happens if we overpay the mortgage at irregular rate - as this can not be guaranteed. Does the sum of the insurance update at all?
If the insurance money will be subject to inheritance tax do we have to calculate that and insure for a larger sum than the mortgage?
I am at a complete loss here. Are we looking at the whole problem in a very distorted way and are missing somethig very simple?
We also have general life insurance policies but they will end before the mortgage term and as I understand it, it's better to get this type of insurance while you're young as later in life the premiums increase.
Thanks!

dunstonh

There is one aspect that I can't quite get my head around and it is the inheritance tax implication. As I understand it, on the event of the death of one of the policyholders, the bank will pay out a sum to cover the existing mortge. But this sum will also be subject to Inheritance Tax and will make part of the deceased's estate. 

no.

A joint life, joint owner, first death policy gets paid to the surviving policyowner and does not become part of the estate of the deceased.      
If the policy was single owner/single life (same person) then it would become part of their estate if it wasn't written in trust.  However, the mortgage liability is in the estate as well and the life assurance and liability would cancel each other out. -  that scenario wouldn't apply on a joint life, joint owner, 1st death basis.

What happens if we overpay the mortgage at irregular rate - as this can not be guaranteed. Does the sum of the insurance update at all?

the life assurance and the mortgage are not directly linked.  They are two independent products.    So, if you overpay the mortgage, the sum assured will decrease as per set up and not change.  Any excess on the life assurance would be retained by the surviving policyowner.

We also have general life insurance policies but they will end before the mortgage term and as I understand it, it's better to get this type of insurance while you're young as later in life the premiums increase.

yes and no.
The increased number of years at a lower age will average out the premium lower but then you will be paying for them longer.    The key about buying it earlier is your health and to insure you have inflation indexation.   i.e. £100k will have the spending power of around £67k in 10 years time.   If you are looking at family protection over a 25 year period, then that initial sum assured either needs to be far higher than you need or you include indexation.

DullGreyGuy

thriftylassy said:

I've been researching a lot about the mortgage life insurance, the decreasing type, to insure our joint mortage.
There is one aspect that I can't quite get my head around and it is the inheritance tax implication. As I understand it, on the event of the death of one of the policyholders, the bank will pay out a sum to cover the existing mortge. But this sum will also be subject to Inheritance Tax and will make part of the deceased's estate. 
When we apply for the insurance they ask us a simple question - how much is your mortgage and how many years have you got left on it. 
What happens if we overpay the mortgage at irregular rate - as this can not be guaranteed. Does the sum of the insurance update at all?
If the insurance money will be subject to inheritance tax do we have to calculate that and insure for a larger sum than the mortgage?
I am at a complete loss here. Are we looking at the whole problem in a very distorted way and are missing somethig very simple?
We also have general life insurance policies but they will end before the mortgage term and as I understand it, it's better to get this type of insurance while you're young as later in life the premiums increase.

It will be an insurer that pays out not a bank, and its paid to the surviving policyholder and so isn't part of the estate. 

There is no actual link between the insurance and the mortgage, it's a decreasing sum term insurance where the curve is designed to mirror a typical mortgage repayment. If you've been overpaying then the you'd get a payout thats bigger than the outstanding mortgage, if you extend the mortgage the insurance will be insufficient to pay off the mortgage. 

As there is no actual link there is no obligation to use the payout to actually clear the mortgage. You could decide to have a really good party instead and just keep paying the mortgage as normal.