Mortgage Protection policies, otherwise known as Decreasing Term Assurance, provide cover that matches the outstanding balance of your mortgage/loan and will pay a lump sum that can be used to pay off the remaining balance of your mortgage/loan in the event of death and/or diagnosis of a terminal illness.
Premiums can be guaranteed throughout the term or reviewable at certain intervals, but should you survive the policy term, there will be no benefit. As this type of contract only provides cover in the event of death and/or diagnosis of a terminal illness there is no surrender value, so if you stop paying the premiums at any time, your cover will cease.
Essentially, term assurance is the cheapest type of life cover and is normally used for the benefit of the life assureds’ family or business, but it does have limitations.
As it has a fixed term, there is no flexibility and you will be unable to increase cover or extend the term. Should your health have deteriorated during the term of the policy, you may be unable to obtain further life cover at the end of the term.
There is no investment element to the policy, and your sum assured will decrease throughout the policy term matching the outstanding balance of your mortgage (providing repayments have been maintained at the current level).
Some products allow you to select the interest rate to match the rate of interest on the mortgage/loan whilst others have pre-set rates, meaning it is important to review the cover if the rate of interest changes.
Premiums are based on your personal circumstances but the main areas for consideration by an insurer are your age and state of health. The older you are, the higher the premium will be. Similarly if you have or had a serious ailment the insurer may seek to charge you more or in some cases be unwilling to cover you at all. Higher levels of cover and longer policy terms all increase cost as will the fact that an individual smokes.