A life insurance policy guarantees that in the event of your death or permanent disability, your direct family members or beneficiaries of the policy will received the designated sum of money. If you have an outstanding debt or mortgage, the policy will cover that as well.
When you take out a mortgage, you have the option of taking out a range of insurance policies linked to it, such as life insurance.
Except for home insurance covering damage to the property, there is usually no obligation to take out mortgage-linked insurance.
Life insurance linked to the repayment of the mortgage is usually taken out as soon as the mortgage is approved, and although it's not a formal requirement, it's certainly recommended because it protects the family and beneficiaries against possible unforeseen events in the future. If you were to die or become permanently disabled, the insurance would pay off the outstanding debt on your mortgage.
Types of mortgage-linked life insurance policies
There are different types of policies depending on how you choose to pay them:
- Single premium: With this type of policy, you make a single payment when you take it out. In some cases, the insurance premium is included in the mortgage.
- Fixed premium: With this type of policy, you pay a fixed amount throughout the life of the mortgage. Your instalments are covered in the event of death, and the policy includes an additional lump sum payable to the beneficiaries.
- Premium based on outstanding principal: Lastly, with this type of life insurance the premium is gradually reduced as you amortise your mortgage. Cover ends when you pay your last mortgage instalment.