Do you have a mortgage?

If so, it’s likely that you have considered protection for your mortgage. Whether this is in the form of life cover or mortgage protection insurance, you have probably either taken out some protection or are considering doing so.

However, research from Sainsbury’s Life Insurance in late 2010 estimated that 7.1 million Brits don’t have any life insurance to cover their mortgage, leaving £320 billion of debts unprotected.

So, if you’re considering protecting your mortgage, here are some tips for how much cover you should consider.

Life cover

Ensuring that your mortgage can be repaid in the event of your death should be one of your primary financial concerns. Leaving your family or dependents a mortgage free property means they can continue living in their home if you’re no longer around to pay the mortgage.

The amount of life cover required differs from person to person depending on your income, debts, mortgage and dependents. However, covering your mortgage debt should be a priority.

If you have an ‘interest only’ mortgage where the amount of mortgage you owe remains constant, you should make sure you have a ‘level term’ policy which provides a fixed amount of cover for the term of your mortgage.

If you have a capital and interest/repayment mortgage you can take out a ‘decreasing term’ policy where the amount of cover reduces in line with your mortgage debt. These policies are designed to repay any outstanding mortgage balance in the event of your death.

Mortgage protection insurance

If you were off work for an extended period due to an accident or ill health, would you be able to continue paying your mortgage? And, could you keep up your repayments if you became unemployed?

Mortgage protection insurance is designed to provide a monthly income to help you meet your mortgage payments and associated bills in the event of accident, sickness or unemployment.

When deciding how much mortgage protection insurance cover you need it is important to look at various aspects. Firstly, you should work out what monthly benefit you need the insurance to pay. Ideally this should be your monthly mortgage payment, your home insurance and your life cover premiums.

You then need to work out what ‘excess period’ you need. How long could you afford to pay your mortgage from your own resources before you’d need the insurance to kick in? If you could pay your bills for three months, take out a policy with a 90 day excess period as this will help you keep your monthly premium down.

It is often advisable to speak to a mortgage or financial advisor regarding your insurance requirements as they can help you establish exactly what level of cover is appropriate for your needs.

Should I have both types of cover?

Many people believe that they need one form of insurance or the other when the reality is that these two types of cover are complementary.

Life cover will repay your mortgage in full in the event of your death but it won’t help you if you’re unemployed or off work for an extended period. Similarly, mortgage protection insurance will pay your mortgage if you’re off for an extended period but it won’t clear your mortgage in the event of your death.