do I need life insurance for a mortgage

Do I Need Life Insurance for a Mortgage?

The short answer is no but in most cases it is recommendable to take out life insurance when taking up a mortgage. A new mortgage is a major life event and a point at which you should consider how taking on this financial responsibility could affect your loved ones in the case of your death.

If of course you have no dependants and your mortgage does not require you to have a policy in place, it is unnecessary.

Mortgage Life Insurance is intended to pay out upon your death however there are insurances you can take out in case you fall seriously ill or are involved in an accident. Such a policy is called Mortgage Payment Protection Insurance.

What is Mortgage Life Insurance?

Mortgage life insurance is any insurance policy with the sole purpose of covering any mortgage commitments you have, ensuring that your loved ones will not have to meet the mortgage requirements themselves.

Endowment policy holders needn’t worry about this as the life insurance is usually included within the endowment.

Mortgage Life Insurance can come in 2 forms, depending on whether you have an interest only or repayment mortgage.

Interest Only Mortgages

With an interest only mortgage, the amount of capital you owe remains the same throughout the life of the mortgage, as such you will require a policy who’s payout will remain constant throughout its term. A Level Term Assurance (LTA) policy is best suited as the amount of cover remains ‘level’ for the term of the policy and will therefore cover the fixed level of outstanding mortgage debt.

Repayment Mortgages

With repayment mortgages, as time passes the capital you owe to the mortgage lender reduces as you have been paying both interest and capital. As such you do not require the same amount of cover at the end of the term as you do at the beginning, and there is little point paying for unnecessary cover! The most appropriate Life Assurance policy to protect a Repayment Mortgages would be a Decreasing Term Assurance Policy (DTA) also known as a Mortgage Protection Assurance policy as the amount of cover falls in line with the reducing mortgage debt.

It is worth noting if you refer to ‘mortgage life insurance’ most professionals will assume you are referring to a Decreasing Term Assurance Policy as a level term assurance is more commonly used for other reasons.

What Mortgage Life Assurance isn’t

Mortgage life insurance described above can be easy to confuse with other similar insurance policies. To make understanding what mortgage specific life insurance is we have outlined what it is not below:

Whole of Life Insurance

Whole of life insurance is more of an investment than an insurance as the ‘event’, death, is going to happen. A whole of life insurance policy will pay out when you die, whenever that may be, unlike term assurance which will only pay out during the agreed term.

Mortgage Payment Protection Insurance

Mortgage payment protection insurance is slightly different to Decreasing term assurance or level term insurance. Mortgage Payment Protection is (in most cases) intended to cover your monthly mortgage commitment if you are involved in an accident or become seriously ill as opposed to in the event of your death.

News

Nationwide Offers First Time Buyers a Discount

Friday 16th October
The nationwide today has stepped forward with 2 new offers to help open up the market for first time buyers.

The offers are as follows; a £500 discount off any reservation fee’s or a £250 discount off reservation fee’s and no legal’s to pay.

The offers are available on The Nationwide’s 3, 4 and 5 year fixed rate deals and also on its 3 year tracker deal.

Mortgage director at Nationwide, Andy McQueen, said: "We are reducing the amount that [first time buyers] need to pay upfront and so hope we've removed a barrier which may have prevented people from buying a home ."

The move will be welcomed, however the true barrier to first time buyers at the moment is the excessive deposit amounts required by all major lending institutes, making a £500 discount as practically useful as a £5 reduction for most.

Coalition to Fight Stamp Duty Formed

Friday 16th October
The National Association of Estate Agents (NAEA) and the Association of Residential Letting Agents have formed a coalition named “1808 Coalition” after the date Stamp Duty was introduced.

The two groups and of course the coalition they form, believe the reinstallation of Stamp Duty at its normal levels will be detrimental to First Time Buyers and Buy to Let Investors.

Stamp duty, which is normally in place for transactions on residential property above £125,000 in value has for some time sat at £175,000 in a bid to re-light the fire under the housing market, however it is due to return to 125,000 on December 31st this year.

Stamp duty is applied to the total sum paid in consideration for a property where that sum exceeds the threshold. For example on a property transaction of £190,000, £1,900 is due in stamp duty (1%), not as many believe 1% of the sum exceeding the threshold i.e. £15,000 (£190,000 - £175,000) or £150 in stamp duty.

Chief executive of the NAEA, Peter Bolton-King, said: "Stamp duty is a barrier to entry for many first-time buyers and is also prohibitive for those looking for a step up the property ladder . The time has come to re-assess Britain's most unpopular tax."

Whilst we cannot agree that it its the most unpopular tax (recent surveys show 31% of respondents take the most displeasure in paying inheritance tax, compared to a mere 23% loathing Stamp Duty) however we support their call for an extension to the raised threshold as in the current market conditions, all stops should be pulled in efforts to draw in first time buyers, life blood, into the market.

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