The Question
My husband and I have just bought our first home, but we are keen to take out some kind of protection insurance in case we couldn’t cover the mortgage. We have two small children and we are aged 32 and 34.
We are slightly confused, however, with some of the terminology used. We can see there are different types of insurance – life insurance, critical illness, income protection. But there are different ‘terms’ – decreasing, level. We are lost.
Please could you explain what these terms mean and what might be best for us.
Thomas’s Answer
Absolutely, and congratulations on your new home! Protecting your mortgage and your family – it’s one of the most important steps you can take.
Let’s break it all down clearly for you. These are the main types of life insurance people look at when buying a house:
-
Life Insurance
- Pays out a lump sum if one of you passes away during the policy term.
- Helps your family pay off the mortgage or manage financially without your spouse’s additional income.
-
Critical Illness Cover
- Pays a tax-free lump sum if you’re diagnosed with a serious illness like cancer, stroke, or heart disease (as defined by the policy).
- This could help cover monthly mortgage payments to allow one of you to stop working during treatment/recovery.
-
Income Protection
- Replaces your income (usually up to 70%) if you’re unable to work due to illness or injury.
- It pays out a monthly ‘wage’ until you can work again or for a set period (like 2 years or to retirement age).
‘Terms’: These refer to how your policy is set up
- Level Term
- The payout amount stays the same throughout the duration of the policy.
- Decreasing Term
- The payout amount reduces over time, in line with how a mortgage usually decreases.
- It’s usually cheaper and is designed specifically to cover a mortgage.
Since you’ve just bought a home and have young children, here’s what people in your situation often consider:
- Life Insurance with Decreasing Term
- Covers the mortgage if one of you passes away.
- Matches the reduced balance of a repayment mortgage.
- Critical Illness Cover (can be added to the above)
- Helps if you get seriously ill and can’t work and need time to recover.
- Family Protection (Life Insurance with Level Term)
- Gives your family a fixed lump sum, no matter when, in the policy term you or a spouse passes away.
- Can help with things like childcare, bills, and education costs.
- Income Protection
- Especially useful if your sick pay package at work isn’t great and you have limited savings of a few months or less.
The right protection for you depends on your mortgage, income, employment, and how much support you want in place for your family
Meet our Expert…
Thomas Heyes, senior protection adviser with The Insurance Surgery, is here to answer your insurance questions. You can read more about him and the business in our profile of The Insurance Surgery.
If you have a question about life insurance leave a message in the comments below or email kate.saines@emap.com
