Life insurance for mortgages

If you’re thinking of getting a mortgage, think about taking out a life insurance policy too. Find out how using some of your income today can protect your loved ones financially if you pass away.

If you’re thinking of getting a mortgage, think about taking out a life insurance policy too. Find out how using some of your income today can protect your loved ones financially if you pass away.

Faith Archer
Insurance expert
10
minute read
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Last Updated 28 FEBRUARY 2022

What is mortgage life insurance?

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

By providing a lump sum to pay off mortgage debt, your loved ones will have one less financial burden at an already difficult time.

How does mortgage life insurance work?

If you have a repayment mortgage, part of your payment each month is used to chip away at the amount borrowed, and part is used to clear any interest owing. The outstanding balance on your mortgage therefore goes down over the years.

Mortgage life insurance is usually designed so that the amount of cover you’d get if the worst happens reduces in line with your outstanding mortgage balance. 

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 left on your mortgage. Because of this, the amount of cover will be different for everyone.

With a decreasing term life insurance policy, make sure you get enough cover to pay off your mortgage from the start, then match the length of your policy to your remaining mortgage term so the pay-out reduces over the years in line with the reducing mortgage balance. 

It’s important to remember that if you move home or remortgage, 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 or shorter than your mortgage

How much does mortgage life insurance cost?

The amount you pay for this type of life insurance depends on: 

  • your age
  • your occupation
  • your health and medical history
  • lifestyle factors, such as whether you smoke
  • mortgage amount owed, term and interest rate 

A mortgage life insurance policy will typically cost less than a ‘level term’ life insurance policy, which is designed to pay out the same fixed lump sum throughout the policy. 

The best way to get an idea of how much you could expect to pay to protect your loved ones is by doing a quick comparison with Compare the Market, filling in a few details about you and the level of cover you need.  

Check the outstanding balance on your mortgage, how many years are left before you pay it off and the interest rate. 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 might want you to have a policy in place as a condition of their mortgage offer.

Many people take out insurance at the same time as getting a mortgage, viewing the expense as a small addition to their monthly mortgage payments. 

A mortgage life insurance policy is designed to provide peace of mind so that, should the worst happen, your family won’t struggle to meet the mortgage bills and will still have a roof over their heads. If you don’t have dependants, you may decide it’s not necessary.

What else should I consider?

You might want to consider level term life insurance with a larger fixed pay-out 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
  • 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 a less common interest-only mortgage. With an interest-only mortgage, your monthly payments only clear the interest and don’t dent the amount borrowed, so the balance doesn’t go down over the years. You therefore need life cover that would pay out the same fixed amount throughout the mortgage, to be sure your loved ones could pay off the home loan if you died.

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 your nearest and dearest will no longer be able to make a claim if you die. 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 offer an initial period, typically 30 days, when you can cancel your policy free of charge and get a refund for any premiums paid so far. 

Check your paperwork carefully to find out if you’re eligible for this cooling-off period, how long it lasts and when it begins. It normally starts from the day you receive your policy documents.

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

Mortgage life insurance is just one of the many forms of life insurance. 

With life insurance, the beneficiary receives a payment upon your death that can be used however they wish.

With mortgage life insurance, the payment 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 with one of the severe illnesses listed on the policy, critical illness cover provides a lump-sum payment that can pay off some or all of your mortgage. Removing this financial burden gives you the chance to recover, with less pressure to rush back to work.

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 death.

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

It’s also worth considering income protection insurance, which pays out a tax-free income if you’re unable to work due to illness or injury.

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. Some insurance providers 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. It may seem very convenient, getting your mortgage and life insurance from the same provider, but you don’t have to get life cover from your mortgage provider. You could find a cheaper deal elsewhere by comparing mortgage life insurance quotes.

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. Normally, if you die while your policy is running, the pay-out will become part of your estate. Depending on the value of your estate, inheritance tax may have to be paid before your dependants receive the money.

If you write your policy in trust, the pay-out escapes any inheritance tax and goes straight to your trustees without being held up by probate.

Can I get a mortgage life insurance policy if I have a pre-existing medical condition?

Yes, usually you can get mortgage life insurance if you have a pre-existing medical issue, but you may need to pay more for your premiums. 

Most insurance providers will assess applications individually, so it could depend on the severity of your condition. Different providers take different views, so it’s worth shopping around.

It’s important to tell your insurance provider about any medical problems that could affect your claim. If you don’t, they could refuse a pay-out. 

Read our guide on life insurance and pre-existing medical conditions.

Will mortgage life insurance affect my mortgage interest rates?

No, taking out mortgage life insurance shouldn’t have any effect on the interest rate on your mortgage. 

However, if your interest rate goes up, it could mean any mortgage life insurance pay-out would no longer cover all of your outstanding balance. 

Don’t forget to review your life insurance policy if you move house, remortgage or if your circumstances change.

Will I be covered if my mortgage provider goes bust?

If your mortgage provider goes bust, your mortgage will be transferred to another provider by financial regulators. Your life insurance will generally be with an insurance provider, so the fact that your 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.

Should I have two single policies or joint cover?

One joint life insurance policy can be cheaper than two single policies, but if one of you died, the policy would end after paying out. The survivor could then face higher premiums if they want new life insurance, because they’ll be older and may have health conditions. 

If you break up, you may not be able to split a joint policy between you. However, one of you may be able to convert the policy into a single policy to cover the mortgage. Check with the provider to see if this is possible. 

Couples who have a mortgage together are perhaps the most suitable for joint cover. But taking out two single life insurance policies offers you the flexibility to list additional beneficiaries and change them depending on your situation, and the potential for two separate pay-outs if the worst happens.

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