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Mortgage Protection Insurance
Mortgage Protection Insurance is also known as Mortgage Life Insurance or Mortgage Payment Protection Insurance and is used if you have a either Repayment Mortgage or an Interest Only Mortgage; and you need insurance which guarantees that, in the event of your death, your mortgage will be fully repaid. The policy is normally written with the mortgage provider specified as the beneficiary as they receive the pay out if you die.
All building societies and mortgage companies recommend, and some insist, that Mortgage Protection Insurance be taken out. The cost of Mortgage Protection Insurance sold by building societies and mortgage companies vary by as much as 60%. So it is important to consult various companies and then go for the most viable one in terms of cost and acceptability.
With a Repayment Mortgage the outstanding value of the mortgage decreases each month as the mortgage is steadily paid off. Therefore, each year less insurance is needed to cover the repayment of your mortgage. Most Life Companies offer special Mortgage Protection Policies cater for this situation, which is generally referred to as 'Decreasing Term Insurance'. Decreasing Term Insurance is the cheapest available form of life insurance.
With an Interest Only Mortgage the outstanding value of the mortgage remains constant as each month only the value of the interest on the mortgage is paid. Therefore, the value of the insurance cover has to be constant to always equal the value of your outstanding mortgage. In these circumstances 'Level Term Insurance' is needed.
The insurance cover in both the cases needs to finish on the date of repayment of mortgage and the length of time between now and the repayment date is called the policy's 'term'. Another important thing to remember is that the outstanding value of both the mortgages is not affected by inflation and, therefore, inflation proofing of the policy (i.e. index linking) is not required.
Policies that cover just one life are called 'Single Life' policies and those that insure two people are known as 'Joint Life Policies'. There are two types of 'Joint Life Policies' but only one is suitable for mortgage protection purposes. If you have a partner, then policies that immediately pay out if either of you were to die whilst insured, are called 'Joint Life First Death Policies'. This is normally the type of insurance you need for Mortgage Protection purposes.
There is another type of policy called a 'Joint Life Second Death Policy'. These policies pay out only if both of you were to die during the period covered by the policy. However, one must note that 'Joint Life Second Death Policies' are not suitable for mortgage protection purposes.
Incidentally, it is important to be aware that if the second person named on the policy is not your spouse then you will have to prove that their death would cause you financial loss.