The difference between life insurance and mortgage protection insurance

Mortgage protection insurance’ can refer to different things. For example:

• Mortgage protection insurance is a type of Payment Protection Insurance (PPI). It insures monthly mortgage costs if the policy holder is temporarily unable to work. You can insure against accident, sickness or unemployment, depending on your priorities. The maximum payment period is between 12 and 24 months, but it could end sooner if you return to work. Legal & General does not offer this type of insurance. Speak to an adviser if you want to find our more. 
• Mortgage life insurance. This type of ‘mortgage protection’ is a life insurance policy that’s designed to cover a repayment mortgage. Unlike Mortgage protection payment insurance, it pays out upon death rather than illness or injury, and only pays out once. Legal & General’s Decreasing Life Insurance is a type of mortgage life insurance.

A fundamental difference between life insurance and mortgage life insurance is what happens to your cover amount during the length of the policy.

With a life insurance policy, your amount of cover will stay the same regardless of when a valid claim is made during the policy term.

In contrast, the potential payout from mortgage life insurance to cover a repayment mortgage reduces over time. So while you will have ‘mortgage protection’ that can lead to a payout following a valid claim, it will likely be a lower amount compared to a level term policy, if the original cover amount was the same.

Mortgage life insurance isn’t for everyone. For example, it might not be the right policy if you want financial protection that doesn’t lessen over time.

Life insurance isn’t just for homeowners, so you may want to consider a standard life insurance policy if you rent or you want protection for an interest only mortgage. And some people with other life costs (such as a child’s education or hobbies) may prefer a life insurance policy, where they could meet these other costs and have the certainty of knowing exactly how much a payout would generate.

However, taking out life insurance to protect a mortgage can have its benefits:

• It works for you. The policy can be tailored to your needs. You choose the amount of cover you need to match your mortgage amount and you choose the number of years you need the cover for. It can be taken in joint or single names.
• It’s cost-effective. With mortgage life insurance, you lessen your chances of over-paying for life insurance. Once your mortgage is paid off, you may feel you have less of a need for life cover, so insurance for a mortgage can protect what you actually need.
• It’s cheaper. Decreasing mortgage protection is often cheaper than other types of life insurance, as we’ll explore next.

Yes, mortgage life insurance is typically cheaper than a life insurance policy. This is because the amount of cover decreases over time so the potential payout is less than life insurance, which is fixed. However, there are many factors that determine life insurance premiums – and whether you can get a policy at all – including your age, overall health, smoker status and alcohol consumption.

Life insurance isn’t just for homeowners. When deciding on what type of life insurance policy you may need, it could help to think about who and what you are trying to protect. If you have children, for example, you may have a wider set of outgoings to protect than just the mortgage. A level term life insurance policy can be a good choice for family and mortgage protection. 

However, a ‘decreasing’ life insurance policy for mortgage protection can be an affordable option if you have a repayment mortgage and you’re looking to keep costs down.

Some people have a combination of life insurance and decreasing life insurance. This can work if you want cover for a repayment mortgage and level cover for family protection.