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 that you won’t leave your family in a financial dilemma or at risk of getting evicted from their home.
Read on to learn how you can protect your home and family with decreasing term life insurance.
Decreasing term life insurance
Decreasing term life insurance is a type of policy whose benefit reduces systematically throughout the contract period. For example, if you 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 to the end of the policy.
Many people take out this policy to protect specific long-term debt, such as a capital repayment mortgage. The policy benefit often reduces at a fixed rate with 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%. In this case, should you pass away within the first year of your coverage, your dependents will receive a lump sum benefit pay-out of £200,000 (which they can use to repay your outstanding mortgage).
After that, the pay-out will be decreasing at a rate of 5% annually, until the final year of the contract when it shall have 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 policy are relatively lower than other term life policies. 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
If you need additional temporary protection (other than mortgage), decreasing term life insurance has got you covered. For example, if you want to secure your children’s financial future while they’re still under your custody or schooling, this policy can cover such needs quite comfortably.
Protect your private assets or business
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 we mentioned earlier, decreasing term insurance is a lot cheaper than it’s level term counterpart. The reason is the amount of cover reduces over time. Even then, the amount of premiums you’re required to pay depends on several factors, such as:
- Whether you smoke
- Your family medical history
- Length of the policy
- Amount of cover you choose
Worth noting is that the older you’re at the time of taking out this policy, the more expensive it will be. Additionally, if you have health issues or are prone to certain medical conditions based on your family history, your insurer is likely to charge you higher premiums than someone else deemed to be at a lower risk.
Over to you!
Now that you’ve discovered how to use life insurance to protect a mortgage, what’s next?
Please don’t shy away from giving your family their dream shelter because you can’t afford the asking price upfront.
Get your decreasing term life policy today, and repay your mortgage securely without interfering with your budget.
Keen on reading more articles? Here’s a good one on ‘digital mortgages‘.