Mortgages: the biggest debt normally taken on by an individual in their lifetime. They typically last from 10-25 years, range from £25,000-£300,000 and come in all shapes and sizes. One product which goes hand in hand with a mortgage and is almost always offered, though not always taken, with a mortgage is some form of insurance. These come in different types, some paying out on accident, sickness, unemployment or other loss of income, others, the most common type, just paying out on the death of the insured individual, is the type I'm going to cover first.
Decreasing Term Assurance is a life assurance policy linked to a mortgage. It decreases throughout the term of the mortgage, typically having a payout value some 10% above the outstanding balance of the mortgage. This insurance policy pays out on the death of the individual enough to cover the remainder of the mortgage. The logic behind this type of policy is that if the main income earner dies at least the rest of the family have somewhere to live without having to worry about reposessions.
Level Term Assurance is another mortgage linked life assurance policy. In contrast to decreasing term assurance the payout does not decrease throughout the term of the mortgage. So if the insured individual dies half way through paying off the mortgage the mortgage is paid off and the family is left with some extra money. Level term assurance is typically more expensive than decreasing term assurance so decreasing term assurance tends to be more popular.
An Endowment Mortgage is a form of mortgage-life assurance combination which was very popular in the Eighties. The assurance policy in an endowment mortgage would pay off the outstanding balance in the event of death before the policy finished. As the mortgage element of endowment mortgages was an interest only repayment mortgage, if the individual died early the capital would be paid off. There is more to endowment mortgages than just the policy, for more information please see here.
Unfortunately, these policies do not cover the eventuality of accidents, sickness or unemployment. Most employers will pay somewhere between one day and six months full pay and the same half pay if an employee is off work due to accident or sickness. However, some illnesses (e.g. back injuries, stress, depression) can last considerably longer than this, meaning that earnings can dry up while there is still a mortgage to pay, and if the individual needs expensive treatment, the mortgage may not be the first priority. It is sadly under these situations that a lot of houses are reclaimed, forcing the occupants to move when they are unwell, further adding to the misery. This is the realm of critical illness insurance or general accident, sickness and unemployment cover options, which it is well worth pricing up before getting a mortgage.
Pension schemes often include a "death in service" element which is a form of stand-alone (i.e. not tied to borrowing) life assurance policy. This pays out a fixed amount usually to a nominated party on death of the individual. Other life assurance policies work similarly. They are very customisable, so that individuals can get the price and cover just the way they want it.
N.b. Individual circumstances vary and these articles only provided for illustrative purposes. I recommend you see a bank assistant or a financial advisor if you need help with your finances.
