Level vs. decreasing term cover: Choose your insurance policy according to your mortgage type
Homes purchased through a mortgage are down by 9% from 2001 to 2011, while the number of households that rent increases.*
Some reasons why:
- High house prices
- Low wage growth
- Tighter lending requirements
*A Century of Home Ownership and Renting in England and Wales, Office for National Statistics
As of 2011, 32% of households own their home through a mortgage. This has fallen considerably – the number of houses bought through a mortgage fell by 749,000 from 2001 to 2011.
This can be traced to the fact that with the economic downturn, a higher number of houses were foreclosed, so much so that the government has instituted actions to help prevent the number of foreclosures.
Mortgage life insurance can help prevent the foreclosure of your home in the event of your death.
Types of mortgages and what mortgage life insurance to buy
There are basically two types of mortgages: repayment mortgage, which is the more popular form, and interest only mortgage. Interest-only mortgage comes in a number of types, which will be discussed in this article.
In the tables below you can find out the most appropriate insurance policy to protect your mortgage depending on its type.
Repayment mortgage
What it is |
This requires a down payment and monthly payments that decrease the amount of the loan over time. At the end of the mortgage term, the entire mortgage loan is expected to be paid in full. |
---|---|
Advantages of a repayment mortgage |
|
Disadvantages of a repayment mortgage |
|
Type of mortgage life insurance coverage |
This should be covered by a decreasing mortgage life insurance policy that is designed to reduce the amount of insurance in the same way that the mortgage loan is decreased. The decreasing mortgage life insurance policy is 30% cheaper than level term. |
Interest only mortgage
What it is |
The loan is provided on the basis that it will be paid back with interest. What happens is that you pay monthly interest to the mortgage lender while securing a way for you to invest that will eventually accumulate enough money to pay for the principal. The investment plan can be in the form of:
The mortgage lender does not have to be the provider of the investment plan. |
---|---|
Advantages of an interest-only mortgage |
|
Disadvantages of a repayment mortgage |
|
Type of mortgage life insurance coverage |
This should be covered by a level term life insurance policy, where the cover remains constant throughout the mortgage term. |
Interest-only mortgage Type 1: Endowment mortgage with a savings plan
What it is |
This is essentially an interest only mortgage, which allows you to pay just the interest on the loan and the entire principal amount at the end of the mortgage term. This makes use of an endowment life policy that covers the person insured’s life and also accrues cash values. When the mortgage term (and the policy term) ends, the endowment paid out will be used to pay the principal. |
---|---|
Advantages of an endowment mortgage |
|
Disadvantages of an endowment mortgage |
|
Type of mortgage life insurance coverage |
This should be covered by an endowment policy (also termed mortgage life assurance policy) that has a level amount of cover and a term equal to the length of the mortgage contract. With an endowment life insurance cover, you ensure that the mortgage principal is paid out in the event that you die before the end of the mortgage term. Know more about mortgage life assurance. |
Interest-only mortgage Type 2: ISA mortgage
What it is |
This is a form of interest-only mortgage linked with an individual savings account, where the account is a stock market investment. With the investments made, the account is expected to collect enough to be able to pay off the principal. |
---|---|
Advantages of an ISA mortgage |
|
Disadvantages of an ISA mortgage |
|
Type of mortgage life insurance coverage |
This should be covered by a level term insurance cover since the mortgage loan remains constant throughout the life of the mortgage. |
Interest-only mortgage Type 3: Pension mortgage
What it is |
This is a form of interest only mortgage linked with personal pension being used as the investment plan. The personal pension fund is invested in the stock market and its earnings are tax-free. When the pension fund matures, it is used to pay off the mortgage. |
---|---|
Advantages of a Pension mortgage |
|
Disadvantages of a Pension mortgage |
|
Type of mortgage life insurance coverage |
This should be covered by a level term insurance cover since the mortgage loan remains constant throughout the life of the mortgage. |
Making the decision
The decision on what type of mortgage life insurance or term life insurance you buy actually depends on the type of mortgage you have. A level term life insurance will be best for an interest only mortgage while a decreasing term life insurance cover is ideal for a repayment mortgage.
If you are committed to paying for your repayment mortgage without refinancing it, then it is best that you get a decreasing term life insurance cover. Meanwhile, if you are considering the possibility of refinancing the mortgage in the future, then you should get a level term life cover.
Latest update: 18.06.2013
Get your mortgage life insurance quote now, fill our form on the right.
Other sites: critical illness cover, lifeassurance.org.