Mortgage protection or life cover?

Everybody knows how important it is to have life assurance, particularly if you have dependents such as a partner or children. The peace of mind that comes from being covered with a great policy cannot be underestimated, especially when the pay out from that policy will go towards supporting your loved ones in the event of anything happening to you.

However, almost three quarters of the UK population have no life assurance, according to exclusive new research from Moneywise. It indicates that millions of British households could face financial hardship from failing to protect themselves.

The findings, from the Moneywise Consumer Opinion Survey of 20,000 people, reveal that just 27.5% of adults surveyed admitted they had life assurance. This is less than the number of people who said they had travel insurance (27.9%) and far less than the number of people who said they have home buildings and contents insurance.

The findings come in the same month that insurer Scottish Widows warned that families could be risking their livelihood by failing to protect themselves financially.

But where does this lack of cover come from? You could argue that a lot of the people who are not insuring themselves for life cover are afraid of the financial ramifications of taking out any kind of policy. In this climate, any expenditure has to be kept to a minimum. But resting on your laurels is a big risk, and you never know when the worst could happen.

Let say it takes 2% of your monthly income to pay the insurance premiums. If you feel that you cannot afford this then, if you can’t live on 98% of your income, how on earth are you are you and your family going to live on 0% if you die or can’t work? Surely it is better to be covered and be able to maintain your lifestyle should anything happen? It is really a no-brainer!

Weighing up the Options

Two of the most popular options for life assurance are term life and mortgage life. They are popular because they give reassurance to families after the worst case scenario happens and somebody dies.

In the case of mortgage life assurance, it covers the balance of your mortgage if a person named on the mortgage dies. There is no way a partner of a deceased loved one will want the burden of sorting out their mortgage during such a stressful and painful time, and mortgage life assurance removes the need to worry about continuing to pay the mortgage.

Term life assurance has become popular due to its flexibility. It pays a death benefit (lump sum or continuing income) if the person named on the insurance policy dies. That money can then be used for anything, such as the mortgage, credit cards, debts or any other family expenses, including school fees. It can also be used to provide an income to replace the one lost if the bread winner dies, and this has a distinct advantage over mortgage life assurance.

There is also, however, a third option and that is whole of life assurance (WoL), and that does exactly what it says on the tin. It doesn’t have a fixed term, so cover will continue until you die or until you stop paying the premium, whichever comes first, in other words, for the whole of your life.

The big question then, is which one should you have? The answer is, of course, two – mortgage life assurance to take care of your mortgage and either term or whole of life to take care of your family.

Whole of life can, however, be used to take care of the mortgage and the family as, unlike term assurance, it is guaranteed to pay out as long as you keep paying the premiums. 

The reason that people don’t take out mortgage or term assurance, is because they think they won’t die during the term, and so the premiums will be wasted. WoL, on the other hand, is bound to pay out, because everybody dies sooner or later!

This means that a WoL policy can be taken out initially to cover the mortgage and then, when that is paid off, it can be used to provide an income for the surviving spouse or an inheritance for the children or grand children. It can also be used to take care of an inheritance tax bill, so that the complete estate passes to the beneficiaries without the tax man taking his share.

Everybody wants to protect their loved ones and, with the correct life assurance policy, you can do that. The effort to educate and raise awareness needs to be doubled, in order to ensure that our families do not have to rely on the state or other family members, if the worst happens.

There is no excuse not to be covered if you understand what the policies do, how cost effective they are and how important they are to you and your loved ones.