Is Your Life Insurance Protecting Your Life — or Just Your Mortgage?
Think back to when you bought your first house or flat. For me, that process was daunting, and the various stages of the purchase seemed never-ending. Getting life insurance in place was a bit of a tick-box exercise to provide cover for the bank loan should the unexpected happen.
Fast forward a few years, and for many of us, that life insurance just sits in place - often creating a somewhat false sense of reassurance. I say a false sense of reassurance because what if that policy only covers your mortgage? Great news for the bank – not so great news for your family.
In this month’s issue of Protection Perspective, I want to take some time to set out the differences between mortgage-focused coverage and comprehensive life protection.
Because, ultimately, not all life insurance is created equal, and many people don’t realise their policy may be doing less than they think.
The Common Misconception
Mortgage protection life insurance is what homeowners are recommended to have to borrow from the bank to purchase a property. This kind of policy is designed to pay off the remaining balance of a mortgage if the policyholder dies during the policy term. In many cases, this kind of policy would be joined and decreasing, meaning both people on the mortgage would share a policy. Effectively, this policy would pay out on first death only, and its value would decrease in line with your mortgage.
There are certainly benefits to this kind of policy. In the worst-case scenario, the policyholder's beneficiaries don't have to worry about making mortgage payments or potentially losing their home, as the policy will pay off the remaining balance.
However, what a mortgage protection policy doesn’t do is anything over and above addressing mortgage repayment. This is where an individual term life policy should come into play. Unless you’re really into insurance (!), you may not be fully aware of the differences between these two types of cover. So let me explain…
Mortgage Protection vs. True Life Insurance
In simple terms, mortgage protection protects your family from having to repay your mortgage in the event of the policyholder’s death. Life Insurance should do a whole lot more. Here’s a quick rundown of the typical features of each type of policy.
Mortgage Protection Insurance:
Tied to the balance of your loan. i.e. will decrease in line with the amount you owe.
Tied to the term of your mortgage, so once you have paid off your mortgage, the policy expires, and you no longer have life insurance.
In the case of multiple mortgage holders, a mortgage protection policy is usually joint as well.
Term or Life Insurance:
Can cover more than just the mortgage: e.g. living expenses to a defined age (usually at least pension age), education, debts, etc.
Policies can be indexed in line with inflation so that they keep up with the cost of living.
Child Critical Illness can be added to Life only policies.
Overall, offers more flexibility and broader protection.
Meet Mr and Mrs Smith, and their two children
We’ve looked at the typical features of each type of policy – but what would life look like for a family covered by mortgage protection only versus comprehensive life coverage?
Scenario 1
In the first scenario, Mr and Mrs Smith never got around to reviewing their life insurance. It was the original mortgage protection policy taken out when they bought their family home. When Mr Smith unexpectedly passed away, the family were reassured that they would be able to stay in their home and that they wouldn’t need to make any further mortgage payments.
However, they quickly realised that, as well as the huge emotional impact on the family, the financial impact was devastating as their income was more than halved and day-to-day finances became extremely stretched. Suddenly, they were dealing with massive upheaval in every part of their lives.
Scenario 2
In the second scenario, the Smiths had reviewed their life insurance shortly after the children were born. They had put in place comprehensive life cover – when Mr Smith passed away, not only was the mortgage dealt with, but the family also received a substantial amount, providing Mrs Smith the space and time to stay with the children, and not have to work. This policy also enabled them to maintain their current lifestyle, providing reassurance and a financial cushion for years.
Who is your Life Insurance protecting – your lender or your loved ones?
It’s so important to take the time to review your life insurance and ensure your policy reflects your full life and your family’s needs, not just your mortgage.
If you’re not sure whether your policy is sufficient, ask yourself these questions:
Is your policy protecting your debt or your lifestyle?
Does the policy payout decrease, and is it tied to the balance of my mortgage?
Will this policy support my family beyond just housing?
If your policy doesn’t adequately protect your family’s future, act now.
