Life insurance can cover your outstanding mortgage loan should you pass away before it’s paid off. Here, we look at why you might want to consider life insurance and whether you need cover to get a mortgage in the first place.
Do I need life insurance for a mortgage?
Life insurance is not something you need by law. There’s also no legislation that says you must have life insurance in order to get a mortgage.
However, most mortgage lenders will insist you have a policy. It may even be a condition of the loan, so money won’t be released until you have cover in place.
Your mortgage lender may also ask you to take out buildings insurance to secure the loan. This would cover the cost of repairing any physical damage to the property, for example if a storm damaged the roof.
Why is life insurance a condition of some mortgages?
Mortgage lenders need a guarantee that if you (the mortgage holder) pass away, the loan will be repaid. Fundamentally, it’s about ensuring they get their money back in the event of your death.
What type of life insurance do I need for a mortgage?
Life insurance policies pay out a lump sum cash payment when the policyholder passes away. With that in mind, most policies can be used to pay off your mortgage, as long as the payout (the sum assured) is enough to cover the outstanding amount.
That said, there is a type of life insurance policy that is actively marketed as ‘mortgage life insurance’ but it’s also known as decreasing term life insurance.
With these plans, the term is fixed in line with your mortgage, for instance if your mortgage term is 25-years, your policy term will be too. The sum assured also gets smaller over time, in line with your mortgage (the ‘decreasing’ aspect).
It’s worth highlighting that mortgage life insurance (or decreasing term life insurance) is often cheaper compared to other types of policy. This is because the payout amount becomes smaller over time (although your premiums remain the same).
What happens at the end of the life insurance term?
Life insurance only pays out if you pass away, although some policies will also pay out if you’re diagnosed with a terminal illness.
If you outlive your life insurance, your policy will end, and no money will be paid out.
What other types of life insurance are there?
As well as decreasing term (mortgage) life insurance, you can choose from:
- Level term life insurance – the sum assured stays the same for a fixed term.
- Increasing term life insurance – the sum assured increases over the term to counteract inflation.
- Whole of life insurance – these policies cover you for the rest of your life so your beneficiaries will receive a payout whenever you pass away (subject to the policy’s terms).
- Over 50s life insurance – these are specifically designed for adults between 50 and 85; policies generally don’t pay out as much as other types of life insurance.
How do I choose the right level of mortgage life insurance?
The most important element to consider is the value of your mortgage. Whatever this amount is, your sum assured should cover it. You may also want to add a little more to cover other costs, for example, funeral expenses or university fees.
If your policy doesn’t cover your outstanding mortgage, you’ll need to be confident that your dependents will be able to meet repayments.
Plus, don’t forget – if you remortgage your home, check your sum assured is still enough.
How much does life insurance cost?
As with other types of insurance, cost will vary according to your own circumstances. To work out your life insurance premiums, providers will consider your:
- Age – the older you are, the more you can expect to pay because of the health risks associated with aging.
- Overall health – as well as asking for your height and weight, insurers will usually ask about your general health.
- Medical history – a pre-existing health condition can affect your premium but it’s important to be upfront with your insurer when asked about this.
- Lifestyle – you can expect to pay a little more if you smoke or drink regularly.
- How much cover you need – the higher the sum assured, the higher your premium is likely to be.
- Length of the policy – policies with long terms typically cost more because there’s a greater risk of making a claim at some point.
Do I need life insurance if I don’t have a mortgage?
It’s entirely up to you whether to buy life insurance or not. If you don’t have a mortgage or dependents, then it’s probably not something you need. But if you’re the main breadwinner, have young children or other dependents who rely on your income, it’s worth considering.
What happens if I have a mortgage but no life insurance?
If the mortgage is in your name and you pass away, the outstanding amount will need to be paid. This will usually come out of your estate and will be prioritised before any of your beneficiaries receive anything. If there isn’t enough money in your estate, the property could be sold by the mortgage lender, enabling them to recoup their money.
If you have left your home to someone in your will, they’ll need to keep up with any mortgage repayments. For example, if your property is left to your spouse or long-term partner, they’ll be expected to continue paying the mortgage. If they can’t the property can be repossessed and sold by the mortgage lender.
Similarly, if you’ve got a joint mortgage, the remaining mortgage holder will be responsible for making the repayments. Again, if they can’t, the property can be repossessed and sold.
Life insurance for peace of mind
Few of us want to talk about death or money, which makes life insurance a difficult topic to broach. However, if you do have dependents that rely on your salary, it’s an important subject to discuss. To help, we’ve put together an extensive guide to life insurance so that you can work out what might suit you best.