How Much Mortgage Life Insurance to Take Out

It is no secret that mortgage lenders strongly encourage their borrowers to take out mortgage life insurance (also known as mortgage life assurance) to protect their investment. However, it is also the case that many mortgage holders want to take out life insurance to protect the financial stability of their family. As a result, serious consideration should be taken to decide how much cover to purchase. Outlined below are a number of factors to consider when deciding how much mortgage life insurance is needed.

Total mortgage loan outstanding

A natural place to start when deciding how much cover to purchase is to find out how much is outstanding on the mortgage loan. Although this is not the maximum that can be insured it does provide an initial starting level of cover to consider before either adding or reducing the level of life cover. The amount of loan outstanding is the total potential financial liability faced by the borrower(s) and is therefore a good reference point for an appropriate level of cover.

Company provided insurance

It is sometimes the case that an individuals company may provide them with life insurance. The amount of cover provided is usually calculated as a multiple of annual earnings. If this is the case an individual needs to decide whether the amount provided is sufficient to cover both their mortgage loan and provide financial security for their family. If the level of cover is sufficient then there is little point paying premiums each month for a separate mortgage life insurance policy.

Savings and family protection

If an individual has substantial savings then they may not need to take out cover for the full amount of their mortgage loan. In this case, the individual’s family could use the payout from the mortgage life insurance to top up their savings and then pay off the loan. However, it is also important to consider the financial position the family will be left in upon death, especially if savings have to be used of pay down mortgage debt. An individual may decide it is better to leave family savings in tact and take out mortgage protection cover instead.

It is not unusual for individuals to take out more life insurance cover than the amount outstanding on their mortgage loan. The reason for this is to provide additional family security upon death. There is no stipulation that the amount of cover taken out cannot exceed the amount outstanding on the mortgage loan. As a result, it is perfectly acceptable to take out additional family cover on top of the mortgage amount, which may be especially appropriate if the family has a low level of savings. Of course, it is also possible to take out one life insurance policy to cover the mortgage and another for family protection.

Thus, before purchasing mortgage life insurance it is important to establish the appropriate level of cover, which may not always simply be equal to the amount outstanding on the mortgage loan. It is also important to consider family savings, family protection and if company life insurance is provided.