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This type of product gives the borrower peace of mind that the mortgage will be fully repaid in the event of his/her premature death and not leaves his/her near and dear relatives in a state of monetary confusion. As a family person and as perhaps the sole breadwinner, the borrower will be secure in the thought that his loved ones will not need to find the money to pay the mortgage each month. In the light of this knowledge many married couples take out a joint mortgage protection policy so that if either one of them was to die during the term of the mortgage, then this policy will ensure that the mortgage will be fully repaid.
There are two types of mortgage protection products: Decreasing Term Assurance and Level Term Assurance.
The decreasing term assurance policy is taken out to protect a capital and interest repayment mortgage. (A capital and interest repayment mortgage not only pays off some of the interest on the mortgage but also reduces the capital outstanding.) If the mortgage repayments are up to date, the capital outstanding will reduce each month. If the borrower or one of the borrowers in the case of a joint policy with a joint protection cover was to die during the term of the mortgage, the capital outstanding at the time of death will be fully repaid.
A level term assurance policy is taken out to protect an interest only mortgage. (An interest only mortgage just pays off the interest and does not reduce the capital outstanding. This means the capital outstanding will not change throughout the term of the mortgage.) So just like it is with the decreasing term assurance policy, if the borrower or one of the borrowers in the case of a joint policy with a joint protection cover was to die during the term of mortgage, the level term assurance policy will ensure that the capital outstanding at the time of death, will be fully repaid.
On comparison, the premium of the decreasing term assurance policy is slightly less than the level term assurance policy premium. While in both policies the premiums are set at the very beginning and remain the same throughout their respective terms, many borrower/s take out a level term assurance policy to protect their capital and interest repayment mortgage. This because there is invariably a surplus amount paid out at the time of death. E.g. a borrower/s takes out a capital and interest repayment mortgage of £100,000 with decreasing term assurance cover. At the time of death the capital outstanding on the mortgage is say £70,000. The life insurance policy proceeds will pay out £70,000 to fully repay the mortgage. However if the borrower/s had taken out level term assurance cover instead, the life insurance policy proceeds will pay out £100,000 leaving a £30,000 surplus for the family to benefit from. So for a slightly higher premium (checkout the comparison website) the benefit one could derive from level term assurance will be greater.
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