Life Insurance Products
A mortgage protection policy is taken out to ensure the repayment of a mortgage in the event of the death of the borrower during the term of the mortgage. If the borrower survives the term of the mortgage the policy will lapse. It will not pay out any sum to the borrower at the end of the term as it is not an investment product. The product merely gives the borrower peace of mind that the mortgage will be repaid in the event of his premature death. If the borrower is a family man he will be secure in the knowledge that his loved ones will not have to find the monies to pay the mortgage each month, especially as he may be the sole breadwinner. Often couples take out a joint mortgage protection policy so that if either one dies during the term of the mortgage the mortgage will be fully repaid.
There are two types of mortgage protection products namely Decreasing Term Assurance and Level Term Assurance.
The decreasing term assurance policy is taken out to protect a capital and interest repayment mortgage. A capital and interest repayment mortgage works like this: when a mortgage payment is made it pays off some of the interest on the mortgage and also reduces the capital outstanding. Provided the mortgage payments are up to date the capital outstanding will reduce each month. In the event of the death of the borrower or one of the borrowers in the case of joint borrowers (providing they have joint cover) the capital outstanding at the time of death will be fully repaid, which depending when death has taken place will be lower than the original amount borrowed.
A level term assurance policy is taken out to protect an interest only mortgage. An interest only mortgage works like this: when a mortgage payment is made it pays off only the interest but does not reduce the capital outstanding. Therefore the capital outstanding will remain the same throughout the term of the mortgage. In the event of the death of the borrower or one of the borrowers in the case of joint borrowers (providing they have joint cover) the capital outstanding at the time of death will be fully repaid, which will be the same as the original amount borrowed.
Of the two products the decreasing term assurance policy premium is cheaper than the level term assurance policy premium. In both instances the premium is set at the outset and remains the same during the term of the policy. However some borrowers prefer to take out a level term assurance policy to protect a capital repayment mortgage rather than a decreasing term policy as a surplus would be available at the time death.
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