You’ve diligently paid off your mortgage, a significant financial milestone that brings a big sigh of relief.
But what about that life insurance policy you took out to protect your mortgage? What happens to it now?
This article aims to guide you through your options and important considerations regarding your life insurance policy, once your mortgage is fully paid off.
What type of policy do you have?
Before going into your options, it’s helpful to identify the type of life insurance policy you hold.
Here are some common types:
Decreasing term insurance
Also known as mortgage protection insurance.
This policy is most often matched with a repayment mortgage. The sum assured decreases over time, just like your mortgage balance.
What Happens: If your mortgage is paid off early, you can continue the policy, but the sum assured will continue to decrease each year.
Level term insurance
The sum assured remains level and constant throughout the policy term. This is more commonly used for interest-only mortgages, but can be used to protect any type of repayment method.
What Happens: You can continue the policy for general life cover, and the sum assured will remain the same.
Whole of life insurance
This policy covers you for your (whole) entire life and doesn’t expire. It’s more expensive, with increasing premiums as you get older but offers longer protection.
What Happens: Since this policy is for life, it continues even after your mortgage is paid off. The sum assured can be used for other financial needs or as an inheritance.
What’s the sum assured?
The term “sum assured” refers to the guaranteed amount of money that will be paid out by the life insurance policy in the event of the policyholder’s death.
In the context of mortgages, the sum assured generally matches the mortgage balance. For a decreasing term life insurance policy, the sum assured decreases over time, much like your mortgage balance. For a level term life insurance policy, the sum assured remains constant throughout the policy term.
The basics of mortgage life cover
Firstly, let’s recap what mortgage life insurance is.
Typically, you might have opted for a decreasing term life assurance policy when you first secured your mortgage. This type of policy is designed to cover your outstanding mortgage balance, with the sum assured decreasing over time, much like the balance on a repayment mortgage.
However, there are other types of life insurance policies you could have chosen, such as level term assurance, which keeps the cover amount constant, or even a whole of life insurance policy, which lasts for your entire lifetime.
Each type has its own set of features and benefits, tailored to different needs and financial situations.
What happens when the mortgage is paid off early?
If you’ve managed to pay off your mortgage before the term of your life insurance policy expires, you might be wondering what happens next.
Contrary to what some may think, your life insurance policy doesn’t automatically come to an end.
The insurance policy is completely separate to your mortgage.
So, what are your options?
Can you keep life insurance going after the mortgage is paid off?
Yes, you can. One option is to continue with your life insurance policy.
The sum assured, which was initially intended to cover your mortgage, can now serve as a financial safety net for your family. The policy will still pay out if you die, and the money can be used to cover other expenses such as your children’s education, outstanding debts, or even act as an inheritance for your loved ones.
Convert the policy
Some policies offer the option to ‘convert’ it into another type of life insurance.
Often this could allow you to change it to a whole of life policy, or a different type of term assurance.
Converting your policy could provide you with broader coverage, albeit at a higher premium. This could be beneficial if your financial responsibilities have changed.
Cancel the policy
If you feel that you no longer need the life insurance cover, you can opt to cancel the policy.
Take some time to consider your options before doing this, as it cannot be reversed. Generally speaking the best time to take out life insurance is when you are young, fit and healthy. As every year passes the cost of getting a new policy will go up.
Term insurance plans, like the ones used to protect a mortgage, don’t usually have a cash in value, and you won’t be able to get any premiums refunded, as you just pay from month to month.
Some whole of life plans do accrue a modest cash-in value. If this is the case you’ve probably been receiving annual statements.
Insurance or assurance?
When I joined the industry in the late 1980’s, life cover was always called ‘life assurance’ and never ‘life insurance’.
At that time the word ‘insurance’ was used for general insurance policies such as:
- car insurance
- pet insurance
- home insurance
- business insurance
- travel insurance
These types of policy lasted for upto 12 months and then needed to be renewed, with a change in premium.
Life cover would have been named:
- Level term assurance (LTA)
- Decreasing term assurance (DTA)
- Whole life assurance
These plans were set up over a set number of years, with premiums that remained fixed throughout.
So what’s changed?
The policies certainly haven’t changed. They work in exactly the same way.
I think the word insurance has just become more associated with these life assurance products, and now people don’t need to consider any alternative names. The internet probably had a lot to do with it. If people were searching online for ‘Life insurance’ then companies had to adapt by using this phrase for their products, so that their websites showed up.
What should you do?
There’s no right or wrong answer here.
It totally depends on your own circumstances and whether the ongoing premiums are affordable for you.
If you keep the policy then your family will receive some extra money, should you die within the remaining number of years.
If you cancel it you no longer have to make the monthly payments. But should you have a need for life cover a few years later, this may be quite hard to get and will almost certainly cost a lot more.
It’s probably a good idea to discuss your options with a financial adviser before deciding.
