If you take out a mortgage, what type of life cover do you need? Well the answer to that question will depend on the type of mortgage you take out. There are basically two variations of mortgages available in the UK. The two types of mortgage are Repayment also known as Capital & Interest and Interest Only.

Let's look firstly at Repayment mortgages and the type of life cover you would need to cover this type of mortgage. A repayment mortgage will decrease as long as you make the required monthly mortgage payment each month. For this type of mortgage you would need decreasing term assurance. As the name suggests the life cover decreases in line with the mortgage debt. To give you an example, Mr Smith takes out a £100000 Repayment mortgage over 25 years at a rate of 4%. He would consider taking out decreasing term life policy over 25 years, that would pay-out if he were to die during the 25 year mortgage term. The initial sum assured would be £100000, the insurer would guarantee to repay the mortgage debt at any time during the 25 year term assuming the mortgage pay rate does not exceed a set rate, usually between 8%-10%. So as long as Mr Smith's mortgage pay rate remains at 4% or does not increase above 8%, there will always be sufficient amount in the decreasing term assurance policy to clear the mortgage debt.

Now if Mr Smith were to take out an Interest Only mortgage of £100000 over the same term of 25 years, he would require a different type of life insurance, called level term assurance. As Mr Smith is only paying interest on his mortgage, the mortgage debt will not decrease and will remain at £100000 throughout the mortgage term and at the end of the mortgage. He therefore needs a level amount of cover i.e. £100000 if he were to die during the mortgage term, he needs level term assurance. As a rule of thumb level term assurance will usually be more expensive that decreasing term assurance. Premiums can be guaranteed throughout the term of the policy or in some instances, insurance companies will allow reviewable premiums which can be cheaper, but may increase after 5 years.