A mortgage is very often the most significant financial decision that any individual makes, and it’s always prudent to find a way of protecting it to ensure that your loved ones will not suffer financially from the loss of your income if you should die. A carefully-chosen life insurance policy is an ideal method of achieving this protection. So what are your options?

Level or decreasing term life cover?

The most common way of protecting your mortgage is to purchase term life insurance. Selecting life cover for mortgage protection requires making a choice between two different types of insurance—level term or decreasing term insurance. The choice is normally dictated by the type of mortgage you have, repayment, interest-only or a combination.

Level term life cover is most often used with an interest-only mortgage where the outstanding debt will stay the same, so the amount you are insured for remains constant over the life of the policy. A decreasing term policy is commonly used to protect a repayment mortgage as the size of the potential pay-out decreases as the mortgage is paid off. Regardless of which type you choose, the policy ends automatically if a claim is made, or when the full term is reached.

The cost of mortgage life cover

The cost of mortgage life cover depends on several factors. The most important being the amount you borrow, and the amount of time you’ll require to pay the mortgage in full. As will all types of life cover, the cost also depends on your lifestyle, age, and physical health. Lastly, the type of policy you choose, level or decreasing term insurance, also affects the cost.

In most cases, level term mortgage cover is more expensive than the decreasing term variety. This is because with decreasing term insurance, the size of the pay-out decreases over time, so the overall cost of premiums is reduced to reflect that. Because all other aspects of these two types of policies are more or less equal—in both cases, the mortgage is fully paid in the event of a claim being made—the type of insurance you get will typically depend on the type of mortgage and how much you can afford.

Level term cover does offer one advantage that decreasing term insurance does not. Because the size of the pay-out is constant over the life of the policy, your dependents will benefit from increased financial security if there is money left over after the mortgage has been paid.

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This is particularly true for people who are setting up a new mortgage who perhaps would previously have just made do with ordinary term assurance. Nowadays however couples and singles want the re-assurance that if the worst happens they won’t have the worry of paying the mortgage.

This is where combined Life and Critical Illness cover be of value because it provides protection which will ensure that if the worst does happen, money is quickly provided as either an ongoing tax-free income or tax-free lump sum. One note of caution though, combining life and critical illness cover in the same policy might be slightly cheaper than taking out separate policies, but if you should make a claim on the critical illness option the whole policy may cease leaving you without life cover when you may be considerably older and in poor health.

In its most basic form Life and Critical Illness Insurance can be relatively inexpensive by providing cover on a reducing basis, perhaps to cover a repayment mortgage or loan. Another way of keeping the cost of Life and Critical Illness Insurance low is to look for a plan which provides only basic Critical Illness Insurance. These plans usually cover the three main critical illness conditions such as Cancer, Heart Attack and Stroke which represent the vast majority of claims. This is a bit like insuring your car third party instead of fully comprehensive but if money’s tight this type of cover is better than none at all.

Life and Critical Illness Insurance provides remarkable value particularly for younger people. For example a male non-smoker aged 25 would pay just £16.21 per month for £150,000 of decreasing Life and Critical Illness cover over 25 years. This however assumes that you are in good health with no family history of critical conditions.

The premiums for this type of cover are based upon the perceived risk. The fact is that if you are in your 40’s you have much more chance of contracting a critical condition than dying before you are 65. And whilst you have a good chance of surviving these conditions your finances may not be so lucky!

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The problem with buying life insurance with critical illness insurance included is price. Critical illness cover can be considerably more expensive than standard life insurance and the difference increases with age. So if you can’t afford to include the critical illness cover option in your policy, what other options are there that will provide financial support if you are critically ill or seriously injured?

There are a number of cheaper policy options that will provide a regular income payout for varying periods of time if you cannot work due to illness or injury. But choosing the right one depends upon the type and level of risk you want to insure.

For example, will you only need enough to pay your mortgage and other household expenses every month for a year or so or will you need your current income to continue for as long as you are unable to work?

The only real cheaper alternative to critical illness cover is an income protection policy. This cover pays up to around 50% of your current pre-tax annual income if you cannot work due to illness or injury and will continue to payout until you return to work, die or the policy ends, whichever is sooner. The disadvantage of income protection insurance is the cover limits imposed and that the benefit may be reduced by any income you receive from state benefits and other protection policies.

If you can’t afford standard income protection cover, the next cheapest alternative could be a budget income protection policy that imposes further restrictions. Otherwise, if you only require cover to protect your mortgage payments, there is Mortgage Payment Protection Insurance, also known as Accident, Sickness and Unemployment cover (ASU), which pays a fixed amount equal to your mortgage repayments and some additional expenses for limited periods of one or two years.

Please bear in mind that the quality of these MPPI or ASU policies can vary substantially so if you are unsure, take advice.

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Whilst most of us are restricted by a budget, price should not be the only consideration and can end up costing you more if it’s the only factor in your search.

Another important consideration is how flexible the policy is should your needs or circumstances change once the cover is in force. This is particularly important for policies with a longer term of ten years or more. A lot can happen in ten or twenty years, from simply stopping smoking to getting married or having a family.

Whatever changes you face, your cover should be flexible enough to adapt to both more or less protection. As the cost of life cover increases with age, the alternative could mean having to cancel existing cover and replace it when you are five, ten or even twenty years older and premiums are higher.

If you are in any doubt, pick up the phone and speak with your chosen insurer before buying. Check that existing cover can be increased, decreased and extended to include additional benefits such as critical illness cover for example.

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Try to calculate how much cover you need. If your need is to protect your family in the event of your death within the term then perhaps you may want to provide a replacement for your income. The cheapest way to provide this type of cover is via Family Income Benefit. In the event of a claim this type of plan provides a regular income to your dependents for the remainder of your chosen term and best of all its tax free.

If its lump sum cover that you need the amount is usually dictated by the amount of your outstanding debts e.g. Mortgages, Loans and Credit Cards. From this amount you should deduct any existing cover including cover which is provided by your employer.

If you only need short term cover say less than 5 years you may be suited with reviewable cover rather than guaranteed cover. Usually reviewable cover provides fixed premiums and cover for the first 5 years after which time the cover and premium will be reviewed in line with the providers own mortality experience. This could result in a significant increase in premiums until the next review. If your requirement is for a term greater than 5 years you may be better off by choosing guaranteed premium cover. Although guaranteed premiums are initially higher than reviewable premiums over the longer term they may well work out much cheaper because once the plan has started the insurer cannot increase the premiums during the selected term of the plan.

So once you’ve established the amount and term of the cover required you can set about comparing the premiums offered by the leading insurers. This is best achieved by using a Discount Life Broker who can provide some of the most competitive premiums available. Believe it or not a Discount Broker can offer lower premiums than obtaining the cover directly from the insurer. How is this possible?

Well it’s quite simply really! A Life Broker is paid a commission by insurers for selling Life Insurance via his agency. If the Life Broker sacrifices a proportion of his commission entitlement the result is that the premiums are reduced. And because the premiums quoted are the same from the Broker and also direct from the insurer the net result is that the Broker can provide cheaper premiums for identical cover.

So in order to obtain cheap Term Life Insurance you need to know precisely what you want and how long for! Then go on-line and shop around and you’ll be surprised just how much you can save in no time at all. Best of all, not only can you obtain instant on-line quotes, you can apply on-line too.

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But there are a range of policy options that can extend the cover provided by a term life insurance plan and could offer greater value for money or peace of mind for no or little extra cost.

A few of the most common options are:

Waiver of Premium Benefit

This option is also known as “Premium Payment Benefit” and is available on most term life insurance policies. If you became ill or incapacitated and could not work, the life insurance company would pay your premiums for you until you returned to work. The cost of adding this benefit is minimal, probably between a few pence to a couple of pounds. There is often a waiting period before the insurance company would pay the benefit, usually 6 months.

Terminal Illness Benefit

Some life insurance companies include this benefit at no extra cost. If you were diagnosed with a terminal illness the life company would pay the sum insured on the plan as long as it wasn’t within the last 18 months or 12 months of the plan expiry date. In these cases the insurance company would not pay out until you died.

Guaranteed vs Reviewable Premiums

Guaranteed premiums will ensure that your premium will stay the same for the entire term of the plan. This type of premium is usually more expensive than Reviewable premiums. Reviewable premiums are cheaper at the outset however the rates are usually reviewed every 5 years so could go up but, they could also could go down.

Separation Option

Not all insurance companies offer this benefit. It is only available on joint policies usually when two people are on a plan to protect a mortgage. If you separate, one of the applicants can continue the policy or both applicants can continue the plan as separate individuals. The benefit of this is that both applicants don’t have to be underwritten again which is particularly valuable if a separation occurs some time after the cover was taken out or if either of the policyholders has had an illness.

Increasing Cover Option (or Guaranteed Insurability Option)

This is quite a common benefit and is usually included as an optional benefit at no extra cost. If you need to increase your level of cover to match a debt such as a mortgage, or your lifestyle changes such as having children, you will be able to increase the amount of cover up to certain limits without further medical underwriting needed.

Please note that it’s really important to get financial advice if you are unsure whether these options will be suitable for your own circumstances.

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Any type of “Insurance” is protecting against someting that may, or may not, occur. For example, a car insurance policy is designed to pay out if your car is damaged by fire, theft or an accident. But none of these events are certain to occur during the policy term. A life insurance policy works in the same way in that it pays an amount of money if you die during the chosen term in years. Again, you may live longer than the policy term or you may die before it and then the insurer would pay out the cover amount.

A “Life assurance” policy is different in that the insurer knows that it will have to pay out at some point. These policies can come in two types, a Whole of Life Assurance and Term Life Insurance. As the name suggests, a Whole of Life policy continues until you die and the insurer will then payout on your death. A Term Life Insurance policy has a set end date and the insurer will then payout on your death or on the policy’s end date, which ever comes first.

Another difference between ‘insurance’ and ‘assurance’ is how Life Assurance policies are funded. In order to support the policy sum assured throughout the term, part of the premiums paid are invested. This means that any payout comprises of either the total value of the investment fund accumulated or the guaranteed sum assured chosen at the policy start date.

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Our busy lives mean that any of these situations and more are subject to frequent change which could result in you being under or over-insured if your cover doesn’t change with your circumstances. This is why a life insurance policy should not be just filed away and forgotten but reviewed every year or following any significant change in your personal or financial circumstances.

Some examples of events that should trigger a review of your cover are:

• Marriage or divorce (or reduction in dependants such as a child leaving home)
• Birth of a child
• Change of job – a new employer may have a different benefits package to your existing employer
• New mortgage or other debt
• Mortgage or other debt paid off

Life insurance is not the only form of financial protection that should be reviewed regularly. Other plans such as life assurance, critical illness cover, income protection, unemployment insurance are related to your personal circumstances and should be regularly reviewed.

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