What is Mortgage Insurance?

by Redeeming Riches on September 23, 2012

Mortgage insurance, unlike many other products in this market, has a fairly straightforward name.  For most people, the mortgage payment is the most significant monthly outgoing.  While all regular bills require payment if legal action is to be avoided, the mortgage also carries the extra weight of facilitating one of the three basics of survival, shelter.  Perhaps the worst case scenario for most families is having the grief of suddenly losing a loved one compounded by the loss of their income, resulting in an inability to pay the mortgage, and the loss of the family home to repossession.

Mortgage insurance, as the name suggests, is designed to insure against just this possibility.  Mortgage insurance typically comes in two forms, commonly known as mortgage term assurance and mortgage decreasing term assurance.  It is at this point we start to encounter some of the more technical language of the insurance industry, and perhaps the easiest way to explain the key differences between these policies is to look at what the jargon means.

Firstly, let’s get the difference between ‘insurance’ and ‘assurance’ out of the way, which in the case of mortgage insurance/ assurance, is pretty subtle.  When you insure against the likelihood of a certain event occurring, there is, in most cases, the chance that said event will never happen – and so a claim will never be made on the policy.  This is the case with life insurance policies which provide cover over a specified or limited term – if you don’t die within the term, a claim cannot be made.

However, in the product that is known as whole of life insurance in the U.S.A, the policy pays out whenever you die, or in other words a claim is sure to happen – thus life assurance.

Now, with both mortgage term assurance and mortgage decreasing term assurance there is clearly a ‘term’, which in this case makes a lot of sense, as the life or term of the mortgage is also finite (and therefore there is no point in having this cover after the mortgage has been paid off).  While you could argue that this ‘assurance’ could more accurately be called insurance, as the limited term means that a claim may never be made, this is really something of a side issue.

Mortgage term assurance provides a set or level amount of cover, meaning that the death of the policy holder during the term will always result in the same level of claim payout (unless the policy is altered at some point).  Logically, the amount of cover at the outset is typically set to equal the sum outstanding on the mortgage.  A claim made towards the end of the term of the mortgage term assurance policy (when the mortgage is almost paid off) will therefore pay off the mortgage, and provide a surplus to the claimants.

Mortgage decreasing term assurance is a cheaper kind of policy to buy, as the sum insured drops in line with the outstanding mortgage balance over the years.  The fact that the sum insured drops over the years – and you are less likely to die at a younger age, towards the beginning of the policy – means that the insurance company can charge lower premiums, to reflect the more modest risk that they will have to make a significant claim payout.  For more information about mortgage insurance, try looking here:http://www.which.co.uk/money/mortgages-and-property/guides/do-i-need-mortgage-insurance/

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