Life insurance for mortgages

If you’re thinking of buying a mortgage, then you ought to be thinking about taking out a life insurance policy too. Find out how using some of your income today can protect the financial interests of your loved ones if you pass away.

If you’re thinking of buying a mortgage, then you ought to be thinking about taking out a life insurance policy too. Find out how using some of your income today can protect the financial interests of your loved ones if you pass away.

Mubina Pirmohamed
Life insurance expert
minute read
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Posted 18 MAY 2021

What is mortgage life insurance?

Mortgage life insurance can be used to help your dependants pay off your mortgage if you die. This type of life insurance is often sold as a decreasing-term policy so, as you gradually pay off your mortgage, your pay-out reduces over time. A mortgage life insurance claim typically pays out as a lump sum.

It’s designed to protect your loved ones if you die before your mortgage has been paid off. It will provide them with a lump sum so they can clear the mortgage debt and have one less financial burden at an already difficult time.

How does mortgage life insurance work?

As you pay off your mortgage over time, the amount of life cover you would get if the worst were to happen reduces – just as the outstanding balance of your mortgage does. This type of life cover is usually paired with a repayment mortgage, where monthly payments are used to repay the amount borrowed as well as any interest still owing.

Learn more about how decreasing-term life insurance works.

What’s the best mortgage life insurance cover?

The best mortgage life insurance cover will depend on you and your individual circumstances. For example, if you’re slightly older or have a pre-existing medical condition, you might have to pay more for your policy. If you’re younger with no medical problems, you could get the same cover at a cheaper price. 

How much cover do I need for a mortgage life insurance policy?

You need to make sure that your mortgage life insurance policy covers the amount on your mortgage. Because of this, the amount of cover will be different for everyone. These types of life insurance policies are commonly on a decreasing term, which means that the potential pay-out will go down in line with your outstanding mortgage. Make sure you get enough cover to pay off your mortgage from the start and match your policy to go down in value alongside your mortgage repayments.

It’s important to remember that if you move home or change the length of time your policy runs for, you’ll need to ensure you have adequate cover in place. Otherwise, you could end up with one of the following:

  • a pay-out that isn’t enough to cover your mortgage
  • overpaying for cover that you don’t need
  • a policy that lasts longer than your mortgage

How much does mortgage life insurance cost?

The amount that you pay for this type of life insurance may depend on:

  • your age
  • your health and medical history
  • mortgage amount owed
  • your salary
  • the level of cover you want

You’ll often find that a mortgage life insurance policy will cost less overall than, say, a level term life insurance policy, where you might pay more to guarantee a pay-out that is fixed for the whole policy life. 

The best way to get an idea of how much you could expect to pay – and whether or not your dependants will get a lump sum after you die – is by doing a quick comparison with us, and telling us some simple things about you and the level of cover you need. 

You should work out how much cover you need and for how long. Ask yourself what the outstanding balance on your mortgage is and how many years are left before you pay it off. Then simply answer a few personal questions about yourself and we’ll provide you with a range of quotes for life insurance from our panel of providers.

Do I need life insurance for a mortgage? 

You don’t have to take out life insurance for a mortgage; it’s not a legal requirement. But some providers will want you to have a policy in place as a condition of their mortgage offer.

It’s quite common to take out a mortgage life insurance policy at the time of your mortgage, so it can easily be viewed as a small extension to your standard payments.

A mortgage life insurance policy is designed for peace of mind so that, should the worst happen, your family’s future in your home is secured. If you don’t have dependents, you may decide it’s not necessary.

What else should I consider?

You might want to consider level term life insurance if you want to cover more than just your mortgage. For example:

  • daily living costs to help your family cope financially
  • childcare and education costs
  • if you have other debts, such as a loan or credit cards, which your family would struggle to pay

Level term life insurance might also be more suitable if you have an interest-only mortgage. This is because the rate remains the same and won’t go down over the years.

Compare the various options and policy details to find cover that’s right for you.

If you’d like some advice on life insurance for a mortgage, contact one of the advisers at LifeSearch. Give them a call on 0800 072 1147.

Lines are open:
Monday to Friday: 8am-8pm
Saturday: 9am-2pm
Sunday: 10am-3.30pm

Can I cancel my life insurance policy?

You can cancel your life insurance policy at any time. However, your cover will end and you’ll no longer be able to make a claim. If you decide to cancel your life insurance policy, you won’t get a refund for the premiums you’ve already paid.

Most life insurance providers will offer an initial period that will allow you to cancel your policy free of charge. This is usually around 30 days in length, and will offer you a refund for any premiums paid within this period. Be sure to check your documents carefully to find out if you are offered this period, how long it lasts and when it begins. This is normally from the day that you receive your policy documents.

Is there a difference between life insurance and mortgage life insurance? 

Life insurance is more of a general form of cover. It comes in many forms, but the beneficiary receives a payment upon your death that can be used however they wish. Mortgage life insurance is specifically designed to cover the remaining amount owed on a mortgage.

Should I get critical illness cover with mortgage life insurance?

If you fall ill and are unable to work, critical illness cover provides a lump-sum payment that can pay off your mortgage or pay towards it. 

If you’d like that extra security, critical illness insurance is available through many insurance providers either as a policy addition, or in combination with your existing mortgage life insurance policy.

With a policy addition, you can receive more than one pay-out: for critical illness and if you should die.

With a combination policy, you’ll receive just the one payment for either illness or death.

Frequently asked questions

Am I eligible for mortgage life insurance?

As long as you’re over 18 years old and a UK resident, you should be eligible for mortgage life insurance. You’ll need to check with your provider as some may have an upper age limit for taking out a policy.

Can I get life insurance for my mortgage from my mortgage provider?

Yes, your mortgage provider may encourage you to take out a life insurance policy with them when taking out a mortgage. You may find that this is a convenient choice, pairing your mortgage and life insurance policy together with one provider.

However, while they will try to convince you that it’s best to take out a policy with them, you don’t have to. A provider might insist you take out life insurance as a condition of their mortgage agreement, but they can’t force you to take out their policy.
If you’d prefer to compare mortgage life insurance quotes first, to potentially find a cheaper deal, then you’re completely free to do just that. By shopping around, you might be able to get a better deal at a lower price.

Can I put a mortgage life insurance policy in trust?

Yes, just like standard life insurance, you can put your mortgage life insurance policy in trust. This is a good idea if you want to protect your pay-out from inheritance tax. If you were to die during your policy’s term, the pay-out would become part of your estate, which means your dependants would need to pay inheritance tax before they receive the money.

If you write your policy in trust, the pay-out is protected and goes straight to your trustees.

Writing your policy in trust is pretty simple, but discuss this with your insurance provider, as they can explain how the process works. If you’re still not sure about something, or your financial situation is particularly complicated, it’s best to get advice from a solicitor or financial expert.

What if I have a pre-existing medical condition?

You might still be able to get mortgage life insurance if you have a pre-existing medical issue, but your choices might be limited. If you find a provider who’ll cover you, it’s likely that you’ll need to pay more for your premiums.

It’s important to tell your insurance provider about any medical problems that could affect your claim. Providers have a list of illnesses and conditions they cover. These will be listed in the policy terms and conditions, so make sure you read them carefully before making an application.

It’s best to be honest and tell your provider about any medical problems you have. If you don’t tell them, they could refuse to pay out for a claim.

Read our guide to find out more about life insurance and pre-existing medical conditions.

Will mortgage life insurance affect my mortgage interest rates?

No, taking out mortgage life insurance shouldn’t change your mortgage interest rates. But you should check that your mortgage interest rate isn’t higher than the rate for your life insurance policy, otherwise you might not be covered for the full mortgage amount.
It’s important to remember that you need to review your life insurance policy if you move house or if your circumstances change.

Will I be covered if my mortgage provider goes bust?

If your mortgage provider goes bust during the period of your mortgage, your mortgage doesn’t get cancelled out. It will be transferred to another provider by financial regulators. Your life insurance will generally be with an insurance company and the fact that the mortgage has switched to another provider shouldn’t make any difference. If you die during the term of the insurance, it should pay out – provided you’re still eligible.

If you got your insurance from the mortgage provider that has gone bust, again the policy should be transferred to a new provider, so your cover should remain intact. The Financial Services Compensation Scheme may be able to pay you compensation if your insurance firm fails and can’t meet your claim. In the unlikely event that a provider does go bust, you should be given all the information you need to understand what will happen to your policy.
If you were in the process of making a life insurance claim when your mortgage provider went bust, it can be slightly more complicated, but the FSCS will cover you for this as well. However, the process of continuing your claim may change.

Should I have two single policies or joint cover?

While one joint life insurance policy can be cheaper than two single policies, it comes at another cost. Should you break up, the policy cannot be split between you, which means that any premiums you’ve been paying are lost if you cancel.

Couples who already have financial commitments together are perhaps the most suitable for joint cover. For instance, if you’re homeowners, a joint policy can pay off the remainder of the mortgage for the other.

Taking out two single life insurance policies offers you the flexibility to list additional beneficiaries and change them depending on your situation, but they can be more expensive.

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