Repay Your Mortgage On Death
A Term Assurance policy is designed to pay a tax free lump sum payment in the event of death occurring during a pre-defined period. For example, the policy term could be 25 years to match the term of a mortgage; if the person insured dies after the policy has commenced but before the expiry of 25 years then a tax free lump sum will be paid.
Joint Life Policy or Single Life Policy?
The insured could be one or two persons. Should the policy insure two people (a joint life policy) then the sum assured is usually paid only once, to whomever were to die first; after this event the policy would cease and no further benefit would be payable.
If it is required to maintain life assurance in the survivors name (i.e. one person in a partnership dies and cover is required to continue) then two single life policies might be arranged, although it is possible with a small number of life insurance companies to maintain cover after one of the insured persons dies.
Level Term Assurance or Reducing Term Assurance?
Level Term Assurance: The sum assured remains the same throughout the policy term. Typically, level term assurance policies are arranged to cover interest only mortgages.
Reducing Term Assurance: The sum assured reduces each year broadly inline with the reducing balance of a repayment mortgage. The sum assured will be sufficient to pay off the mortgage at interest rates up to 8%
Premium rates can be ‘guaranteed’ or ‘not guaranteed’; if guaranteed then the premium will remain the same throughout the policy term. If not guaranteed then the premium may increase (may happen if the insurers’ claims experience worsens)
Level of cover can usually be increased in some circumstances; e.g. marriage, birth of a child
Polices can be placed ‘in trust’ which enables benefits to be paid to a certain person outside of your estate (can be useful if there is an Inheritance Tax Planning requirement)