What is mortgage protection insurance?
Mortgage protection insurance, as you might expect, is put in place to provide protection for the mortgage so that policy holders do not lose their family homes. It is sometimes known as decreasing life insurance and it basically means that the pay-outs from these policies get smaller over time, because obviously the longer it lasts, the less payments there will be on the mortgage. So, as an example, if you were to take out a policy for twenty years and pass away five years into the policy, the lump sum pay-out would be much higher than if you had passed away, say, seventeen years into the term. This is where it differs from level term insurance where the pay-out is the same, no matter how long the policy lasts, or how soon into the policy the policy holder passes away. It is also different from increasing term insurance, whereby the pay-out increases with each passing year.
Why choose a policy that pays less as time goes by?
Now, we understand that nothing in life is getting cheaper, and the costs of living are a perfect example of that. So then, you’d be forgiven for wondering why people would choose to pay the same amount of money each month for a policy which pays less with the passing of each year. Well, primarily, most people find that this type of insurance fits the needs of their families. It also depends on estimated living costs for the future. Primarily, though, the main reason why people choose these policies is usually because they cost considerably less than many other forms of life insurance out there.
When might mortgage protection insurance not be suitable?
As beneficial as this type of insurance policy can be, it isn’t necessarily right for every circumstance. If for example, you are looking to provide cover for an interest-only mortgage, this type of policy likely won’t be as beneficial. This is because the pay-outs for these policies will fall each year until it reaches zero. This therefore works very well for debts that decrease as time passes by, such as capital and interest repayment mortgages. With an interest only mortgage, though. As you pay the interest off, at the end of the term you will still owe the loan amount back that you borrowed. In this instance, a whole of life insurance policy may be more suitable.