Mortgage life insurance: what is it and do I need it?

5 min read

Mortgage life insurance: what is it and do I need it?
A mortgage is one of the biggest financial decisions you can make, as it is a commitment that usually lasts decades. Your life will likely change substantially during the time it takes to pay off your mortgage.
For example, you may start a family, who may have children of their own or you could change careers or move. Sadly, you may also develop an illness, putting your ability to pay your mortgage at risk.
Mortgage life insurance can be useful by covering your payments if you or your spouse die. This article reveals what you need to know about mortgage life insurance.

Mortgage life insurance: what is it?

The death of a main earner can have big financial implications for your family, especially with any debt obligations such as a mortgage.
A mortgage life insurance policy pays out if the policyholder dies so their spouse and dependents can pay off the mortgage. So, it ensures your loved ones don’t risk losing their home while struggling with bereavement.

What does mortgage life insurance cover?

Depending on the type of policy, if you die, your family will receive either a fixed lump sum or enough to cover the outstanding balance of the mortgage.
If your family needs to make a claim, your policy will then end. Of course, you may pay into the policy for your entire mortgage term without using it.
This is a best-case scenario as it will mean you haven’t died, but you won’t be able to claim any payments back.

Do you need life insurance for a mortgage?

If you have dependents or are married, cohabiting or are in a civil partnership, it is vital to ensure your mortgage payments can be made if a main earner dies.
If you are single and have no partner, children, elderly relatives, or other dependents, you may not need this type of insurance.
Landlords may also be fine without mortgage life insurance as tenants’ rent will usually cover the mortgage, and the property is likely to be sold if the owner dies.
You don’t necessarily need this type of insurance when getting a mortgage, but it is strongly recommended you have some form of protection to ensure your mortgage can be paid if you die.
If your family is unable to keep up with payments, they may be forced to sell the home and move out.

Mortgage life insurance how much does it cost?

When searching for a mortgage life insurance policy, there are a few details to be aware of.
The premium you pay depends on many factors, including:
  • Your age: The older you are, the more you risk becoming ill. So, it is better to take out your policy when you are younger.  
  • Your job: What you do has a huge impact on the level of risk you face every day. You may have to pay higher premiums if you work with heavy machinery, dangerous chemicals, or deal with other potentially dangerous working practices.  
  • Health: If you have any ongoing health conditions, getting a policy may be harder or cost more.  
  • Lifestyle: Insurance providers will consider certain factors, such as whether you are a smoker, which increases your chances of developing cancer.  
A financial adviser or mortgage broker may be able to find the best policy for your unique circumstances.

Is mortgage life insurance worth considering?

Mortgage life insurance offers peace of mind that you have significantly reduced the financial stress on your family if you die, particularly if you have a dangerous profession.
So, it can be hugely beneficial to have.

How much mortgage life insurance do I need?

The average amount of cover for a single term, decreasing cover life insurance policy is approximately £150,000.
However, the amount of cover you need may be different. When you consider how much cover you need, it is worth considering your finances beyond your mortgage.
While your mortgage may be your biggest expenditure over the length of the policy, it may not be your largest monthly expense.
For example, any childcare and education costs need to be considered as well as other debts.
You should ensure your family is financially protected by looking at the wider picture instead of purely focusing on your mortgage.

Mortgage life insurance: what are the different types?

There are two main types of mortgage life insurance to consider.
Decreasing term life cover will pay out what is left to pay on your mortgage.
This is usually the cheaper option as your mortgage debt falls over time, so any dependants will need a smaller payout the longer the policy lasts.
Level-term cover pays out a lump sum if you die within a fixed term, so it’s usually more expensive as the payout remains the same over the course of the policy term.
When choosing a mortgage life insurance policy, it is vital to consider your living costs and the shortfall in income if your salary is no longer available.

How do I get the right mortgage life insurance policy?

Working out your level of cover and whether to opt for a decreasing or level term policy is complex.
Most of us will only deal with this type of insurance once or twice in our lives, so it can be valuable to have someone experienced with insurance to guide you through the process.
An IFA or mortgage broker may be able to offer vital support by helping you find a quote and by taking all of your unique circumstances into consideration.
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Should I write the policy into trust?

One aspect of taking out a mortgage life insurance policy that many do not consider or are not aware of is the tax implications that arise should they die.
Your life insurance is part of your estate, so your family may have to pay inheritance tax (IHT).
You can typically avoid this by writing the policy in a trust, so the insurance pays out directly to your dependents and is not part of your estate.
Most policies offer this option for no extra charge, but it is worth consulting an IFA beforehand. 

Should I pay for two single policies or joint cover?

Another important consideration is whether you want two single policies or joint cover.
A joint policy tends to be cheaper than two single ones, but it will likely only involve a single payout on the death of the first policyholder.
While two single policies are more expensive, you are guaranteed two payouts when each of you dies.
Another factor is if your relationship breaks down, you will have to cancel a joint policy. In contrast, both parties can continue to hold a single policy if they have two separate ones.

Should I get critical illness cover?

Critical illness cover is usually an optional extra to your mortgage life insurance. It pays out a lump sum if you are diagnosed with a serious condition or have a life-threatening incident.
You get a tax-free lump sum to help you cover the cost of living.
Taking out critical illness means higher premiums, and not all providers cover the same illnesses and conditions. So, reading the small print is vital to ensure you have the right cover.
Also, be honest about any underlying illness or any that runs in your family. If an insurer can prove you did not disclose it, you could end up with no payout.

What is the difference between life insurance and mortgage life insurance?

The main difference is that decreasing-term mortgage life insurance is designed specifically to help you pay a falling level of debt.
Life insurance policies tend to pay out a lump sum regardless of how long you have the policy, and your premiums will likely stay the same for the entire policy term.
Unbiased can help quickly connect you with a qualified mortgage broker, financial adviser or accountant who can help you with your financial goals.
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