Mortgage Insurance: the Basics

Mortgage insurance is basically a form of life insurance which is designed to pay off the mortgage if you die within the term of the policy, with the ‘term’ simply being the length of time that the cover is in force.  The term and level of cover provided by mortgage insurance is usually set to match the number of years and outstanding balance left on the mortgage.

Naturally, as the mortgage is paid off over the years the amount of money required to settle up with the lender decreases.  Mortgage decreasing term assurance is a policy that reflects this reality, with the level of cover provided decreasing over the years, usually in line with the diminishing mortgage balance.  Since the level of payout due in the event of a claim drops in this manner, the mortgage decreasing term assurance provider can offer affordable premiums, which reflect the low risk of paying out a large claim at the beginning of the policy, as a younger policy holder is statistically less likely to die.

Mortgage term assurance costs a little more in regular premium payments, as the level of cover provided stays the same throughout the policy (unless altered at some point by the policy holder).  This means that a claim made late on in the life of the policy will typically yield a lump sum that exceeds the outstanding mortgage balance, thanks to the mortgage being paid off over the years.  However, the level of cover provided is the choice of the policy holder, and some may choose to keep premiums down by setting a level of cover that is lower than the outstanding mortgage balance at the outset of the mortgage term assurance policy.

One of the other factors that can make things a bit more complicated, with mortgage decreasing term assurance, is a fluctuation in the interest rate of the mortgage.  In a typical policy, an interest rate exceeding 10% during the life of the mortgage can mean that the amount paid out in the event of a claim is lower than the outstanding mortgage balance.

Perhaps the most important thing to be aware of with mortgage insurance, and indeed all life insurance, is that a successful claim requires certain preconditions to be met.  In a nutshell, this is mainly about full disclosure to the insurance provider, and giving accurate information regarding every question that is asked in the application form.

Failure to mention medical conditions is a common reason that life insurance policies become void at the point of claim.  As well as full medical disclosure, there is a list of information that must be kept up to date and provided to the insurer if the policy is to remain valid, including changes in occupation and place of residence, extensive travelling plans, certain pastimes, and alcohol, tobacco and recreational drug use.  A sudden demise due to certain activities, like taking part in extreme sports, can also fail to meet the definition of a ‘qualifying’ death, and render the cover void – so as with all insurance, reading the small print is essential before settling on a policy.  More information about mortgage insurance can be found here.

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