The decision to take out life insurance is most commonly triggered by a major life event. In this article, we will discuss how a mortgage can affect your needs for life cover, the differences between mortgage protection life cover and a family income benefit, and how they can complement each other.
It’s usually at a key moment in our lives that the need for life insurance is heightened – particularly when we take on greater responsibility, such as the costs involved in buying a home or having a child. Something that every mortgage borrower needs to consider is what will happen to their property if they were to pass away. This is especially important if you are buying a home with a loved one or have financial dependants who will live in your home with you.
After establishing that you need life insurance to protect the financial future of your loved ones, the next question is how much cover do you need? Needless to say, the more cover you take out, the higher your monthly premium payments. Key considerations when calculating how much cover you need could be factors such as the size of your mortgage, number of dependants and their ages, whether you get work benefits from your employer and so on. This is why it is important to seek advice when considering your options.
Decreasing term life insurance
This is generally the most cost-effective option, offering the lowest premiums. It is commonly taken out to cover a repayment mortgage; as the mortgage balance decreases, so does the cover amount.
The term of the policy will usually align with that of the mortgage, covering what is for most of us our largest purchase – our home. If you were to pass away during the term of the cover, a tax-free lump sum would be paid out to your family, which they can then use to clear the outstanding mortgage.
While decreasing term can be a good option if you have children who depend on you financially, level term cover, or even a family income benefit, may be more suitable.
Family income benefit insurance
There is the option of the lesser-known family income benefit insurance, also known as FIB. Instead of paying out a single lump sum, FIB provides monthly tax-free payments of a pre-determined amount to be paid to the surviving partner or guardian. The regular monthly payments can make long-term family budgeting easier, contribute to the costs of raising your family or even cover the mortgage payments, although you will not be able to clear the mortgage instantly.
FIB premiums are generally low, because the further into the policy you get, the lower the number of payments that will be made.
How do they work together?
It is common to take out multiple policies to cover for different purposes. For example, a decreasing term policy to cover your repayment mortgage on the family home alongside an FIB to cover future living costs if you have children or a dependant partner. In this scenario, the mortgage would be cleared, which would be one less bill for the surviving partner to worry about. However, the household would still be reduced to one income, and that income may not be able to cover the remaining household bills. FIB is the solution for this – especially if there is one main earner in the family.
What should you do?
If you are thinking about arranging either of these types of cover, it is important to speak to a specialist adviser – contact Mortgage First for more information