There’s no legal obligation to buy mortgage life insurance but it’s a good idea if you’re married, cohabiting, or have children.
You may also find that some mortgage lenders make life insurance a condition of advancing the loan – although you are under no compulsion to buy any policy they may offer you. You are free to arrange your own cover.
If you’re single without dependents, and no one else relies on you financially, mortgage life insurance isn’t necessary. However, there are other protection products such as critical illness cover and income protection that are worth considering.
What is mortgage life insurance?
Mortgage life insurance is a way to make sure your mortgage will be paid in the event of your death.
Mortgage life insurance is also known as:
- decreasing term insurance
- mortgage protection
- mortgage term assurance.
A mortgage life insurance policy pays a lump sum to your dependents to cover your outstanding mortgage if you die during the policy term.
Assuming the amount of cover – known as the ‘sum insured’ – is large enough, a life insurance policy can also cover other financial commitments such as household bills, child care and education expenses, as well as your mortgage.
Is mortgage life insurance compulsory?
As noted, there’s no legal requirement to hold mortgage life insurance. And most mortgage lenders won’t insist you buy life insurance when you take out a mortgage.
They reckon that, if the worst were to happen, they could get their money back from the sale of your property.
However, your mortgage lender or broker may offer life insurance when you take out a mortgage. But again as noted, there’s no obligation to buy it from them – you’re free to shop around.
Who needs mortgage life insurance?
You should consider buying mortgage life insurance if you:
- are married
- have a joint mortgage with your partner
- have dependent children
- support anyone else with your income
Mortgage life insurance if you’re married
If you’re a married couple and own a home together, having life insurance in place will protect your spouse and children financially in the event of your death.
It could mean the difference between your family being able to continue living in your home or being forced to sell up.
For couples, it’s not just the breadwinner who needs life insurance. Stay-at-home parents typically take care of childcare, cooking, cleaning and household maintenance. These costs would need to be covered in the event of the stay-at-home parent’s death.
Mortgage life insurance if you have children
It’s a good idea to have mortgage life insurance if you have children who depend on you financially.
You can take out a policy that will cover not just your mortgage, but the costs associated with your children too – such as child care, child maintenance and education costs.
Having a policy in place means your family would be protected if you were to pass away.
Mortgage life insurance if you’re cohabiting
If you’re an unmarried couple and you buy a home, the affordability assessment of your mortgage will usually be based on both your salaries. If one of you died, would the other person be able to keep up the regular mortgage payments on their own?
If they couldn’t, buying life insurance and naming your partner as the beneficiary would protect them.
If you’re an unmarried couple and you have children, life insurance is even more important. Unlike married couples, cohabiting couples are not entitled to bereavement benefits or widowed parent’s allowance on their partner’s death.
Should couples buy two single policies or a joint one?
If you’re married or cohabiting, you can each buy a single life insurance policy or take out a joint policy which covers you both.
A single life insurance policy covers one person. When that person dies the policy pays out a lump sum to their estate with the proceeds, in turn, passed to their beneficiaries.
A joint life insurance policy covers both partners, but only pays out once, which is after the first death. The idea is that the money will help the surviving partner pay the mortgage or bills.
Joint life insurance is usually cheaper than the combined cost of two single policies. But it only pays out once, so the death of the first partner will mean the end of the policy. If the surviving partner sets up a new policy, he or she may find the premiums are more expensive due to their age or health.
Having joint life insurance can also make things tricky if you split up. You’ll normally need to cancel the policy and take out a new single policy each.
Mortgage life insurance if you’re single
You don’t need mortgage life insurance if you’re single, live alone, don’t have children, and no one else relies on your salary. If you die in this scenario, the beneficiaries of your will or those managing your estate would normally sell your home to pay off the outstanding mortgage.
There are other types of protection you should consider if you’re single. These include:
- Critical illness cover This pays out a lump sum on the diagnosis of certain conditions such as cancer, heart attack or stroke.
- Income protection This pays you a regular income if you have to stop working due to sickness or disability.
What are the different types of life insurance?
Term insurance pays out if you die within a given time – this is known as the ‘term’.
You’ll normally choose a term that matches your mortgage term or until your children have left full-time education. The payout is the same amount at whatever stage in the term you make a claim.
Decreasing term insurance It is cheaper than term insurance as the benefit is payable on death falls each year until it is zero by the end of the term. This type of life insurance is used to protect mortgage payments as the more payments you have made before you die, the less you will be left for the policy to pay off.
Whole-of-life policies guarantee to pay the sum assured on the death of the person, whenever it occurs. This is the most expensive type of mortgage life insurance and is often used for investment and tax-planning purposes, rather than as a way to cover debts and living expenses.
How much does life insurance cost?
When you buy life insurance, you’ll agree to pay a monthly premium in return for a set amount of cover (the ‘sum assured’). Premiums start from just a few pounds a month.
How much you’ll pay depends on several factors including:
- how much cover you want
- how long you want it for
- your age and gender
- what job you do
- your medical history
- whether you smoke or not
- Whether you opt for a single or joint policy.