What mortgage life insurance or mortgage protection insurance?

Bearing in mind this site is all about life insurance mortgage life insurance or mortgage protection insurance is life cover that is taken out to protect your mortgage. The reason we reiterate this point is sometimes people refer to mortgage protection insurance and actually mean mortgage payment protection insurance which is a cover to protect your mortgage payments in the event of sickness accident or redundancy. If you are looking for this type of insurance you might want to try one of our sister sites, EasilyCovered.co.uk where they will be able to assist you.

That said and assuming it is the life insurance type of mortgage protection insurance you are looking for let us explain exactly what it is.

Mortgage life insurance is specifically designed to protect a repayment mortgage. It is important to be aware of this fact as mortgage protection insurance is completely unsuitable to protect an interest only mortgage or any other type of mortgage that is not be repaid in a traditional repayment route.

The main reason is to do with the amount of debt which is outstanding at any one time with a repayment mortgage. If you take out a repayment mortgage, as the name suggests you are repaying the debt.

This happens throughout the term of the loan, if you make your regular monthly payments the debt will come down until the final payment, when it is completely repaid and discharged.

Owing to the fact that you are charged interest on the total debt outstanding every month the amount that you actually repay of the capital in the early months can be quite small. However as the months and years go by this amount increases and the effect of this causes what is known as a repayment curve, with the amount of debt outstanding reducing slowly in the early years until being repaid and the end of the loan term. This can be seen from the graph above.

As you can see the debt is falling in a curve to the eventual zero figure at the end of the 25 year period. Obviously this graph assumes a 25 year mortgage and short or longer mortgages will have a differing effect on the repayment curve for example shorter terms result in far steeper repayment curves.

As this is a curve and not a straight line the need to mimic it for insurance purposes is vital. If you did not accurately mimic the curve you might have to much or too little life insurance cover which in the case of the latter would be financially catastrophic.

It is for this reason we have mortgage protection insurance. This type of plan is designed to accurately mimic the repayment curve of any mortgage. To safeguard this most life companies give further assurances that they will guarantee to repay repayment mortgages subject to them not exceeding certain interest rates. This ensures that should the life assured die at any point during the term off the debt and subject to them making all the due payments on that debt then the loan will be repaid in full.

Owing to the fact that this type of life insurance decreases as a mortgage would decrease if being repayed every month, it is worth noting that it is wholly unsuitable for any other type of mortgage such as an interest only mortgage. This is because the debt would remain level on an interest only mortgage but the cover would decrease leaving you gradually more and more uninsured as time went by. For your information if you have an interest only debt the most suitable type of life insurance is level term assurance written for the same term as the debt has to run.