Life Insurance: A Mortgage Must-Have?

Life insurance is not a legal requirement for getting a mortgage. However, it is a good idea to have it in place before activating your mortgage. This is because it can provide financial security for your loved ones in the event of your death, allowing them to pay off the mortgage and maintain their current lifestyle. There are different types of life insurance policies available, such as level term and decreasing term, which can be tailored to your individual circumstances and needs.

Life insurance is not mandatory for a mortgage

If you don't have dependants, you may not need life insurance. However, whoever inherits your property may need to sell it unless they can pay off your mortgage or get a mortgage on the property themselves.

It is worth noting that mortgage providers might offer to arrange life insurance for you, but you are not obliged to buy it from them and may get a better deal elsewhere.

Mortgage protection insurance

MPI is similar to life insurance in that it pays out benefits upon the policyholder's death. However, there are some key differences. Firstly, the beneficiary of an MPI policy is typically the mortgage company, not the family of the deceased. Secondly, MPI policies often do not require underwriting or a medical exam for qualification, whereas life insurance policies take into account factors like health and occupation when determining premiums. Finally, MPI policies are generally less flexible than life insurance policies, as the payout can only be used to cover mortgage payments and not other expenses.

The cost of MPI depends on factors such as the remaining balance on the mortgage loan, the time left on the loan term, the age of the policyholder, and the desired amount of coverage. While MPI offers peace of mind and guaranteed acceptance, it may not be the best use of your money, especially if your mortgage is almost paid off. Additionally, the payout amount decreases over time as you pay off your mortgage, while the premiums remain the same.

Overall, MPI can be a good option for individuals who cannot qualify for or afford traditional life insurance, or those with unstable employment who may need assistance with mortgage payments in the future. However, if your family would benefit more from a payout that can be used for expenses beyond the mortgage, a traditional life insurance policy may be a better choice.

Level term life insurance

While it is not a legal requirement to have life insurance to get a mortgage, it is a sensible precaution to take. Life insurance can provide financial support to your loved ones in the event of your death, which can be used to pay off or support mortgage payments. This can help to relieve the financial burden on your family and prevent further disruption during an already difficult time.

However, there are also some drawbacks to consider. Level term life insurance policies have an end date, so your cover will cease once the policy term ends. Additionally, these policies do not accumulate cash value, so there is no investment component that could increase the value of the policy over time. Finally, if you choose to renew your policy after the initial term, your premiums are likely to increase as they will be calculated based on your age at the time of renewal.

When considering level term life insurance, it is important to weigh up the pros and cons in relation to your own circumstances. Factors such as your age, health, budget, financial goals, and the level of financial responsibility you have (e.g., supporting a young family) should all be taken into account when deciding if this type of insurance is right for you.

Critical illness cover

If you are diagnosed with an illness or injury covered by your policy, you will typically receive a one-off, tax-free payment. This money can be used to pay off your mortgage, cover any loss of earnings, or make necessary adjustments to your home. Critical illness cover can be purchased as a standalone policy or added to an existing life insurance policy as an optional extra.

Eligibility and cost considerations:

To be eligible for critical illness cover, you must be a UK resident aged 18 or above, have a UK bank account to pay the premiums, and disclose your full medical history. The cost of critical illness cover depends on factors such as age, health, lifestyle, and the amount of cover required.

Comparing critical illness cover with other types of insurance:

When considering critical illness cover, it is essential to compare it with other types of illness insurance, such as income protection insurance. Critical illness cover tends to be less expensive, but it may have limitations in terms of the conditions covered and the duration of coverage.

Choosing the right critical illness cover:

When selecting a critical illness policy, carefully review the specific conditions covered and the severity required to make a claim. Additionally, consider the term of the policy and whether you need to include additional cover for pre-existing medical conditions, as this may increase the cost.

In conclusion, critical illness cover can provide valuable financial support during challenging times. However, it is important to carefully review the policy details, compare it with other types of insurance, and ensure that it aligns with your individual needs and circumstances.

Whole life insurance

While not a legal requirement, life insurance is often considered when taking out a mortgage. This is because it can provide peace of mind and financial security for your loved ones should the worst happen.

However, it is important to note that whole life insurance policies generally have higher premiums than term life insurance. Additionally, the cost per dollar of coverage may increase over time as the death benefit decreases, making it a potentially expensive option.

When considering any life insurance policy, it is important to weigh the costs and benefits based on individual circumstances, such as budget, mortgage balance and term, and the financial needs of loved ones.

Frequently asked questions