What does a mortgage protection insurance policy cover?

The average sum that you can borrow with a mortgage is over £100,000. This makes it a very large amount of money that is paid back over a very long period, usually up to 25 years. The repayments on this mortgage are in the hundreds monthly, and can be in the thousands. Furthermore, the amount loaned is based on the income of the person who applied for the mortgage. Your house needs to be valued, as the loan will be secured upon it. If you can't keep up the payments for any reason, you could lose the home. Therefore, you need to cover both yourself and your dependents should something happen in your life that affects your ability to keep up your repayments.

In the worst case, the person who took out the mortgage could die. If that person's income has been making the repayments every month, it is extremely likely that the bereaved can't keep up the repayments. If this happens, they could lose their home, and this could be disastrous. However, this can be mitigated should you take out an insurance policy aimed specifically at paying off your mortgage.

Your monthly mortgage repayments reduce the remaining capital on your mortgage. They also pay off some of the interest as well. So you may have taken out a mortgage for £100,000, but after a year of payments you would have, say £97,000 left. So, at the beginning of the year you would need to cover £100,000, but at the end of the year you would need to only cover the remaining £97,000. After each monthly payment, you need a decreasing amount of cover, and you need the cover for the remaining term of the mortgage so a mortgage protection insurance policy is thus called decreasing term assurance.
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So a mortgage protection insurance policy covers a sum assured, which is reduced by an agreed amount (usually equal) over the course of the term of the cover. This sum will only be paid out should the person whose life is assured die during the course of that term. There is no surrender value, and the premiums will be the same throughout the term of the policy. Since the sum assured is decreasing, the premiums will be lower than for normal level term cover.

The mortgage protection insurance policy shares much of the same limitations as any other kinds of term insurance policies. Since they have a fixed term, there is no flexibility. You are not able to extend the cover should you think that you are going to survive the term, and there is not surrender value if you end the policy during the term.

 

 

 

© AskFinancially.com 2008

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