There are many different types of insurance and policies out there.
Two important ones to know the difference between are life insurance and mortgage protection insurance.
Read on to learn more.
What is life insurance?
Life Insurance is a type of insurance whereby a lump sum of money is paid out if a certain individual dies, in return for regular payments being made during their lifetime (or a single upfront payment).
When an insured person died, the named beneficiaries on the life insurance policy will receive the lump sum.
There are two main types of life insurance:
- Term life insurance policies which expire after a certain number of years
- Permanent life insurance policies, which remain in place until the person dies, stops paying, or cancels the policy.
Many people take out life insurance if they consider themselves vulnerable to passing away in the next few years.
This could be for a number of reasons, including from a family history of certain conditions or a dangerous job.
All of these details must be accurately disclosed when a policy is taken out, as it impacts the offer you receive.
Do you need life insurance for a mortgage?
You are not legally obliged to take out life insurance to get a mortgage.
However, many mortgage lenders consider it to be preferable. So, lenders will look more favorably upon people who have a life insurance policy in place.
After all, if you are the primary money-earner in the family, it puts a lot of pressure on your survivors if you pass away. This helps them to pay off the mortgage.
In many cases, this circumstance would force the family to downsize – which is why many people consider life insurance.
What is mortgage protection insurance?
Mortgage protection insurance guarantees that your mortgage payments are made if you are out of work due to something outside of your control.
The most common examples are:
- An accident
- Sickness
- Unemployment.
It’s not to be confused with homebuyer’s insurance which is insurance that covers the conveyancing process.
Typical terms of mortgage protection insurance
The vast majority of mortgage protection insurance policies pay out for up to 12 months or until you return to the workplace – whichever comes sooner.
You should also keep in mind that some providers have a limit of up to £2,000 per month, although this is not the case with all firms.
If you are successful with your insurance claim, you will have to wait anywhere between 30 to 180 days for the payment.
You can sometimes opt to delay payments for even longer, in return for cheaper premium payments, but this can leave you in an awkward financial position.
Why do I need mortgage protection insurance?
A mortgage is probably the most significant payment that anyone has to make in their lifetime.
It is therefore a common concern for homeowners – and getting protection in the event of an unexpected problematic situation can be very valuable.
Many families also need mortgage protection Insurance if there is one sole money earner in their family.
This leaves them increasingly vulnerable because if that person is unable to work, there are no other sources of income to help pay their mortgage.
In the worst-case scenario, mortgage protection Insurance can save you from losing your home.
What’s the difference between life insurance and mortgage protection insurance?
Life Insurance pays out when you pass away, whereas mortgage protection Insurance only covers your mortgage payments for the period of time that you are out of work.
Both types of insurance can help you to make your mortgage payment, but only one (life insurance) is used for someone passing away. The other is only used if you become temporarily unable to work.
