4 min Read
27 Sep 2010

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

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Money tip #105 – Take out life insurance

Tom Curtis / FreeDigitalPhotos.net

Tom Curtis / FreeDigitalPhotos.net

You can get insurance to cover just about anything these days. However, while a lot of people understand the importance of certain insurances, such as home insurance, life insurance is often overlooked.

But ask yourself the question ‘how would my family cope financially if I died?’ As morbid as it sounds you need to consider the impact of your own death on those left behind, particularly if you are the main breadwinner. Unless you have left them with sufficient assets the chances are that they may well struggle to cope. What sort of legacy is that to leave behind?

So how much and what type of life insurance do you need? I answer that question here. But, if you can only afford to take out a minimal amount of insurance I would suggest that you at least try and cover your mortgage.

At least cover your mortgage

In the event of your death your mortgage doesn’t simply disappear, the debt still stands. Obviously the bank will want their money so if your mortgage is jointly held with your spouse then they will become solely liable for the monthly mortgage payments. This could be disastrous if their own income is insufficient to meet the monthly bill. This might lead to your home having to be sold in order to pay the outstanding debt so rendering your family homeless. (for more information on what happens to debts on when someone dies click here)

This can all be avoided by taking out life insurance which matches any outstanding mortgage at the date of death. That way in the event of your death the insurance policy pays out and clears the outstanding mortgage – leaving your family with a house to live in mortgage free. So if you have:

  • A repayment mortgage – you should look into taking out a decreasing term assurance policy with a term that matches that left on your mortgage, and a sum assured matching the debt outstanding at the time of taking out the insurance. A decreasing term assurance policy is one where the sum assured decrease over time at a similar rate to which you are paying off your mortgage.
  • An interest only mortgage - you should look into taking out a level term assurance policy with a term that matches that left on your mortgage, and a sum assured matching the mortgage amount initially borrowed. A level term assurance policy is one where the sum assured remains the same throughout – which will reflect the fact that you are not repaying your mortgage but simply paying off the monthly interest.

Often your mortgage lender will require you to take out a life assurance policy as a condition of their lending, but in reality this is seldom enforced and a lot of people have mortgages in place with no life cover.

One final point, don’t forget to consider the impact of your spouse dying. Could you cope financially on your own? Again you may want to at least consider taking out life insurance on their life so that your mortgage is cleared should the worst happen.

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