Taking out life insurance alongside a loan is an obvious step - but the question of "how much cover?" has two layers here. The first is the debt: the loan shouldn't fall on the family even in the worst case. The second, which people often forget: beyond the mortgage payment, the family also has to live. Good cover alongside a loan is therefore typically more than the loan amount.
- Base layer: the outstanding loan balance - for a decreasing debt, decreasing cover can also be chosen.
- Second layer: replacing the family's expenses - after the loan is paid off, everyday life also needs cover.
- Bank group cover typically provides only the first layer - it doesn't replace the family's needs.
First layer: covering the debt
The starting point is the outstanding balance, not the amount originally borrowed. Since the debt decreases over the term, there are two routes: level cover (simple, the surplus protects the family) or decreasing cover (cheaper, it tracks the debt). With an annuity-type loan, the debt shrinks slowly at first - so it's worth matching the decreasing cover's schedule to the loan's repayment table.
Second layer: the family
If the cover only pays off the loan, in the worst case the home will be free of debt - but nothing replaces the bills, the school, everyday life. That's why, ideally, the amount alongside a loan is made up like this: debt + the family's income replacement for the necessary years: how many years? The full method: mortgage + bills + plans.
Bank group cover or a standalone policy?
The group credit life cover offered at the bank branch is convenient, but the policyholder is the bank, its terms are fixed, and it typically can't be carried over if you switch loans. A standalone term life policy is yours: you can obtain competing offers for it, its beneficiary is the family (with a clause in the bank's favor if the bank requires one), and it can continue even after the loan ends. The bank is typically required to accept suitable standalone cover - the full comparison: bank vs. standalone.
Two practical tips
- When switching loans or repricing, take a look at your cover too: the new arrangement comes with a new balance and a new term - a review is a must here.
- With early repayment, decreasing cover "shrinks" faster than planned - it's worth adjusting the amount to the new balance, and putting the freed-up premium toward the family layer.
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