Insurance

How To Use Life Insurance To Protect A Mortgage

Purchasing a home is one of the most significant milestones you can achieve at any stage in life.

But sometimes, you may not have the financial muscle to buy your dream home upfront, prompting you to go for a mortgage. If you are considering going this route, chances are you’ll encounter many lenders who require that you get life insurance as collateral before granting you the mortgage.

They do this to protect themselves if anything happens to you; they are assured of getting their money back. Likewise, you will enjoy more peace of mind knowing you won’t leave your family in a financial dilemma or risk getting evicted from their home.

Learn how to protect your home and family with decreasing term life insurance.

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Decreasing term life insurance

Decreasing term life insurance is a policy whose benefit is reduced systematically throughout the contract period. For example, take out a 30-year policy and pass away during the early stages of the contract period. Your dependents will receive more financial support than they would if you departed nearer the policy’s end.

Many take out this policy to protect long-term debt, such as a capital repayment mortgage. The policy benefit often reduces at a fixed rate every turn of the year.

Let’s take a look at the following example.

Suppose you take out a 20-year plan worth £200,000 at a reducing rate of 5%. Should you pass away within the first year of your coverage, your dependents will receive a lump sum benefit payout of £200,000 (which they can usepayoutpay your outstanding mortgage).

After that, the payout will decrease at a monthly rate until the final year of the contract, when it shall have been reduced to zero.

Buying a decreasing term life cover to protect your mortgage

There are many ways to pay off your mortgage, including making a down payment, recasting, refinancing, and making scheduled extra payments. These are all viable payment options, but they’re not as flexible and cost-effective as taking out a decreasing term life insurance.

Here are some of the reasons you should go for this policy if you’re looking to protect your mortgage:

The policy is relatively affordable

The premiums for decreasing term life insurance policies are relatively lower than others. This makes it suitable if you’re on a tight budget but still want to guarantee optimum mortgage protection if you pass away.

The best cover for temporary needs

Decreasing term life insurance covers you if you need additional temporary protection (other than mortgage). For example, if you want to secure your children’s financial future while they’re still under your custody or schooling, this policy can comfortably cover such needs.

Protect your private assets or business.

Have you ever wondered what would happen if you were to pass without meeting all your financial obligations? If you don’t have a backup plan, the lenders may come knocking to auction whatever is left of your business or personal assets.

Good news: you can protect your family from going through all these by taking out a decreasing term life insurance so they can use the proceeds to take care of your debts, loans, and other expenses.

How much does a decreasing term insurance policy cost?

As mentioned, decreasing term insurance is much cheaper than its level-term counterpart. The reason is that the amount of coverage is reduced over time. Even then, the amount of premiums you’re required to pay depends on several factors, such as:

Whether you smoke
Age
Your family medical history
Length of the policy
Amount of cover you choose

Worth noting is that the older you are at the time of taking out this policy, the more expensive it will be. Additionally, suppose you have health issues or are prone to certain medical conditions based on your family history. In that case, your insurer will likely charge you higher premiums than someone else deemed to be at a lower risk.