Life Insurance And Mortgages: What's The Connection?

Life insurance is not a legal requirement for getting a mortgage, but it is often strongly recommended by lenders and financial advisors. This is because it could provide financial protection for your loved ones if you were to pass away before paying off your mortgage. The pay-out from a life insurance policy could help your family pay off the remaining mortgage and maintain their current standard of living. It could also prevent them from having to sell their home during an already difficult time.

There are different types of life insurance policies available, including decreasing term life insurance and level term life insurance, which can be tailored to match the term of your mortgage. While life insurance is an additional expense on top of your mortgage, securing a policy sooner rather than later will ensure that you can lock in the cheapest possible premiums for the lifetime of your policy.

Life insurance for mortgage: pros and cons

Pros

• Peace of mind: Life insurance can give you peace of mind, knowing that your family will be able to carry on paying the mortgage in the event of your death. This can help to reduce stress and allow for more comprehensive financial planning.
• Financial stability for your loved ones: Life insurance can provide financial stability for your loved ones during a difficult time. The payout from a life insurance policy can be used to pay off the mortgage or support payments, preventing your family from facing financial hardship or the loss of their home.
• Cost-effectiveness: Term life insurance policies, which are often the most suitable for this purpose, can be relatively inexpensive, providing substantial benefits at a manageable cost.
• Flexibility: With term life insurance, you can match the coverage amount and policy length to your mortgage. You can also pick a coverage amount or length that factors in other financial responsibilities, such as your annual income or children's college tuition.
• No medical exam required: Mortgage life insurance generally does not require a medical exam and may have no health questions, making it an alternative for those with medical conditions who may not qualify for traditional life insurance.

Cons

• Lack of flexibility: With mortgage life insurance, the death payout goes directly to the mortgage lender, whereas with term life insurance, the death benefit goes to your beneficiary who can use the money as they see fit (including paying off the mortgage).
• High premiums: Mortgage life insurance policies generally cost more than term life insurance policies for the amount of coverage you get. If you're in good health, you can usually get more value from a term life insurance policy.
• Limited payout options: The payout from mortgage life insurance only goes towards your mortgage debt. It cannot be used to cover taxes, bills, or funeral costs.
• Lack of transparency: It can be difficult to obtain quotes for mortgage life insurance online, making it challenging to compare policies and prices.

Types of life insurance for mortgage

Life insurance is not mandatory when taking out a mortgage, but it is highly recommended. There are various types of life insurance policies available to homeowners, with the most common being decreasing term life insurance. This type of insurance is a cost-effective option for people with a repayment mortgage, as the potential payout decreases over time, running in parallel with your mortgage, which also reduces with each repayment.

Level term life insurance may be suitable if you have an interest-only mortgage or if you would like extra protection to support your family financially. This type of insurance offers a level benefit and a level premium for the term of the policy.

Another option is to take out two policies: a whole life insurance policy to provide long-term coverage and a term life insurance policy to cover the balance of the mortgage for the early period (10-15 years) when the amount owed is the highest.

Mortgage life insurance is a type of term life insurance designed specifically to repay mortgage debts and associated costs in the event of the borrower's death. The term of the policy matches that of the mortgage, and the death benefit is usually reduced each year to correspond with the new amortized mortgage balance outstanding.

Critical illness cover is not a life insurance policy, but it could potentially pay out a cash lump sum that could be used to keep up with mortgage repayments if you fell ill with something covered by the policy.

Is life insurance mandatory for mortgage?

Life insurance is not a legal requirement for getting a mortgage. Your mortgage provider will not ask you to buy it. However, it could be beneficial to have life insurance, as it provides financial support to your loved ones in the event of your death. This money could be used to pay off the remaining balance on your mortgage, relieving your family of the financial burden and allowing them to keep their home.

There are various types of life insurance policies available, including dedicated mortgage life insurance. Decreasing term life insurance, for example, could be a cost-effective option for those with a repayment mortgage as the potential payout decreases over time, in line with the balance of your mortgage. Level term life insurance may be more suitable for those with an interest-only mortgage or those seeking extra protection for their family.

While life insurance is not mandatory, it is worth considering the financial security it can provide for your loved ones. The cost of life insurance varies depending on the policy, but term life insurance is generally more affordable than whole life insurance. When deciding on the duration of your life insurance policy, it is essential to consider your specific financial obligations and personal circumstances. Many people choose a term that matches the length of their significant financial commitments, such as a mortgage, to ensure that their family can maintain their home if they pass away.

In addition to life insurance, you may also need to consider buildings insurance as a legal requirement when getting a mortgage. Buildings insurance covers the structural aspects of your home, such as walls, roof, floors, fixtures, and fittings, protecting the value of the mortgaged property in case of any damage.

Life insurance for landlords with mortgages

Life insurance is not mandatory when taking out a mortgage, but it is highly recommended. If you are a landlord with a mortgage, you may want to consider taking out life insurance to protect your investments.

Mortgage Life Insurance

Mortgage life insurance, also known as mortgage protection insurance, is a policy that pays off your mortgage debt if you die. This type of insurance is not always the best option as it designates your mortgage lender as the policy's beneficiary, meaning your loved ones do not receive a death benefit. However, it can give you peace of mind that your mortgage will be paid off, and your family will not face the burden of mortgage payments or the loss of their home.

Term Life Insurance

An alternative to mortgage life insurance is term life insurance. This type of policy gives your family flexibility, as they can use the life insurance payout for any pressing financial need, including paying off your mortgage. With term life insurance, you can match the coverage amount and policy length to your mortgage, or you can choose a coverage amount and length that factors in other financial responsibilities.

Critical Illness Cover

While not a life insurance policy, critical illness cover provides a financial safety net if you fall ill. This can help you keep up with mortgage repayments and allow you and your loved ones to focus on your health.

Factors to Consider

When deciding whether to take out life insurance, consider your personal circumstances and financial obligations. If you have a mortgage, think about whether your dependents could afford to keep up with the payments if you were no longer around. Also, be aware that life insurance costs can vary depending on the policy you choose, with term life insurance typically being more affordable than whole life insurance.

Landlord Insurance

It is important to note that landlord insurance is different from mortgage life insurance. Landlord insurance includes specific buildings insurance and liability cover that is not connected to the event of death.

Life insurance for mortgage: how to save money

Life insurance isn't mandatory when taking out a mortgage, but it's highly recommended. It can give you peace of mind and ensure your family is able to carry on paying the mortgage in the event of your death.

Understand the different types of life insurance

There are two main types of life insurance that can be used to protect a mortgage: decreasing term life insurance and level term life insurance.

• Decreasing term life insurance is the most common type of policy for mortgages. It is affordable because the potential payout decreases over time, in line with your outstanding mortgage balance.
• Level term life insurance is ideal for protecting an interest-only mortgage because the cover amount stays the same throughout the term.

Other types of insurance that can provide financial protection include critical illness cover and income protection insurance.

Shop around for the best price

Don't just go with the policy offered by your mortgage provider. Get quotes from multiple insurers and consider using a broker to find the cheapest prices.

Choose 'guaranteed premiums'

When buying mortgage term cover, opt for guaranteed monthly payments, which means the cost will be fixed for the life of the policy. Reviewable premiums may be cheaper at first, but the insurer can increase the cost later on.

Take out a policy sooner rather than later

Life insurance premiums tend to increase with age, so securing a policy when you are younger can help lock in cheaper rates.

Be honest about your health

Disclose all health conditions and risks when applying for life insurance. This ensures that your policy is suitable for your needs and will cover you if your dependents need to make a claim.

Write your policy 'in trust'

Writing your policy 'in trust' means the payout won't be considered part of your estate, avoiding inheritance tax and speeding up the payout to your dependents.

Consider a joint policy if you're buying with a partner

If you're buying a house with a partner, consider taking out a joint policy. This can be cheaper than having two single policies, but keep in mind that it will only provide one payout.

Review your policy regularly

Life circumstances can change, so it's important to review your life insurance policy periodically. For example, if you've quit smoking or remortgaged and owe less, you may be able to find a cheaper policy.

Frequently asked questions