There are a number of common triggers which drive people to take out life insurance cover; having a child, losing a loved one, getting married and purchasing a property.

For most of us taking out a mortgage to buy a home is the biggest financial commitment we are ever likely to make. Therefore, it makes sense to take out suitable financial protection in order to safeguard the family home.

But with so many policy options now available, which is the right one to meet your specific needs.

Below we run through all the available options to help you make an informed decision.

Life insurance

Life insurance is the most common form of financial protection taken out after the purchase of a property.

The concept is very simple; you decide on a cover amount (the sum assured) and the length of cover (the term), then you make a monthly payment (the premium) to the insurer to receive the cover.

If the policyholder passes away during the policy term, a cash lump sum will be paid to your loved ones to use as they wish; clear the mortgage, fund future living costs, pay for the funeral etc.

When it comes to covering a mortgage there are two main life insurance options.

1. Level term

Level term policies cover you for a set period of time (up to 40 years). It makes sense to align the term length with your mortgage term to ensure you are always protected.

You determine the cover amount at the point of application and this sum remains fixed (or level) regardless of when you may pass way during the policy term.

2. Decreasing term 

Decreasing term policies (sometimes known as mortgage life insurance) work in the same way as level term policies apart from one fundamental change, the cover amount decreases over the lifetime of the policy. 

As the financial risk to the insurer reduces over time, decreasing term cover is cheaper than level term and it is commonly used to cover a repayment mortgage. As your mortgage balance reduces so does the sum assured.

With all life insurance policies, the cost of your monthly premium is determined by the level of risk you pose (or put another way, the likelihood of a claim). The greater the risk, the higher the premium. 

Factors such as your age, medical history and smoking status have a significant impact on the cost of cover. The best way to lock in the lowest premium is to take cover out whilst you are still young and healthy.

If you are a non-smoker in your 20s with no pre-existing medical conditions, you could secure approximately £225,000 of cover for just 20p a day.

You can compare level term vs decreasing term quotes using Reassured.co.uk. Their broker service is completely free to use.

Income protection

Whilst life insurance pays out a cash lump sum if you are no longer around to provide, income protection insurance pays out a monthly income if you are unable to work due to injury or illness.

Income protection payments will not enable you to clear the mortgage as with life insurance, however they could help with monthly mortgage repayments and enable you to remain in the home. This is especially important if you are self-employed and don’t receive any financial protection through your employer (like sick pay).

Income protection can pay out up to 70% of your usual salary, helping take the pressure off you and your dependants whilst you are not earning.

There is no reason, budget permitting, not to take out both life insurance (to cover the mortgage if you are no longer around) and income protection (to cover living costs if you are unable to work), although this will obviously mean paying two separate premiums.

As with life insurance, the greater the risk you pose the higher your income protection payments will be. Again, the younger you take out cover, the cheaper it will be.

Critical illness cover

For additional financial protection you may want to take out life insurance with critical illness cover.

This works in the same way as a standard life insurance policy however if you become critically illness during the term with a condition covered by your policy then you are entitled to an early pay out. (Please note, once a pay out is issued the policy elapses and your family will not be entitled to a second pay out after you pass).

These funds could help replace an income, clear the mortgage or perhaps help fund medical fees or any required adaptations to your home.

This additional level of protection will inflate your monthly premiums significantly, as a pay out is statically much more likely.

Death in service benefit

If you are employed by a company, you may be entitled to a death in service benefit. This is usually a payment of 3x your annual salary made to your loved ones if anything were to happen to you whilst in that employment. 

The greater your own life insurance cover sum, the higher your monthly premium will be - so why not factor in this work placed benefit to help lower your personal cover amount? 

Please note if you leave a company the death in service benefit creases.

In summary

We hope the above has provided some useful information on the different policies available and which option may best meet your needs.

If the last few years have taught us anything (COVID-19) it is that you never know what is around the corner and so having adequate financial protection in place is essential to provision for a worst-case scenario.

Hopefully our selfless investment in our family’s future is never realised, but having this reassuring safety net in place could one day be the best decision you ever made.