Mortgage Protection Insurance is designed specifically to protect your mortgage in the
event of your death, ensuring that your mortgage will be fully repaid if you have either
a Repayment Mortgage or an Interest Only Mortgage.
When you buy a mortgage you will be advised to take out mortgage protection insurance,
some mortgage lenders even insist on it. However be aware that Mortgage Protection Insurance
sold by building societies and mortgage companies is often up to 60% more expensive than
identical insurance purchased from the cheapest mortgage protection insurance provider
- so make sure you shop around!
If you have a 'Repayment' Mortgage
Because the outstanding value of your mortgage decreases as you steadily pay off your
mortgage, you need less insurance each year to cover the repayment of your mortgage. In
this case you will need 'Decreasing Term Insurance'. With this type of policy the level
of cover is automatically decreased as your mortgage is repaid. Your insurance cover will
finish on the date that you finish paying off your mortgage. The length of time between
the start and the end of the policy is the policy's 'term'.
If you have an 'Interest Only' Mortgage
Because each month you are only paying off the value of the interest on the money you
have borrowed, and the outstanding value of your mortgage remains constant - the value
of your insurance cover will always equal the value of your outstanding mortgage. You therefore
need 'Level Term Insurance', and the end of the 'term' will be when you are due to repay
your mortgage.
The outstanding value of a mortgage is not affected by inflation so you don't need to
worry about inflation proofing (i.e. index linking) your policy.
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