Do you need life insurance for a mortgage?

No, you don't normally need life insurance for a mortgage but in many circumstances, it is a good idea to have life insurance just in case. Life insurance will protect your home against repossession if you die before the mortgage is repaid - a situation where your family may struggle to make the mortgage repayments without your income.

A mortgage is most likely the biggest debt you will leave behind if you die before it is repaid. It is possible to get your mortgage debt covered cheaply with life insurance, but in this article, we explain what you should consider first and how to get up to £100 cashback* if you do need life insurance.

What is mortgage life insurance?

Mortgage life insurance covers you in case you die and can be arranged to cover one person with a single life cover or two people with joint life cover. Mortgage life insurance can be referred to as mortgage protection insurance, mortgage decreasing insurance or reducing life insurance - these are different names for life insurance that covers your mortgage balance if you die before it is repaid.

Some mortgage life insurance policies are designed to reduce as your mortgage balance reduces and are only appropriate if you have a repayment mortgage where you are paying your mortgage off gradually and the balance of your mortgage is reducing over your mortgage term.

Essentially, mortgage life insurance prevents a situation where you die before your mortgage is repaid and your family or people who live in the property are unable to keep paying for the mortgage. If you die, your income is lost to your household and this could be what sustains your mortgage payments.

You can choose to buy mortgage life insurance that will pay a lump sum to your beneficiaries so that they can pay off any remaining mortgage balance upon your death or you can buy life insurance that pays a regular amount to them so that they are able to cover the monthly mortgage payments.

Is life insurance necessary to get a mortgage?

Life insurance is not necessary but is often recommended when you buy a house and in many situations, it is a good idea to buy life insurance with your mortgage.

Despite what your mortgage broker may tell you, the only insurance you need for a mortgage is buildings insurance. This gives the lender certainty that the property they are lending against is protected and there is insurance in place that will cover the cost of rebuilding the house or repairing any damage that might be done accidentally. Without, buildings insurance, your mortgage lender would have no way to recoup the money it has lent you to buy the property if the property's value is affected by weather or an accident.

As the homeowner, you need to ensure that you continue to repay your mortgage regularly to avoid falling into arrears and potentially facing home repossession. If anyone who is contributing towards repaying the mortgage dies before it is repaid, it will fall to others in the household to take over the mortgage payments. In many situations, the people left behind will be children and/or a partner who can't cover all of the mortgage payments on just their own salary. Mortgage life insurance is a way to cover your household in this situation so that they have enough money to cover the mortgage payments or simply pay it off so there are no more mortgage payments.

It is possible to get a life insurance policy that would cover the mortgage debt or one that just covers the monthly repayments, but regardless of what lenders and financial advisers may push, it is not compulsory to have either policy in place when borrowing money to buy a house. It will, however, provide a good degree of peace of mind to most people.

Remember, the mortgage lender can recoup the money lent to you by selling the house in a worst case scenario so life insurance is about protecting those who rely on that house as a home and not the lender.

Do I need mortgage life insurance if I live alone?

In some cases, such as if you are single and have no dependents, you may not need life insurance. If you were to die before repaying the mortgage, the mortgage balance would become a debt against your estate and would have to be repaid, potentially using the assets within your estate, including your house, before these could be passed onto beneficiaries.

Normally the house would be sold to repay the debt unless there were other means within your estate to settle the mortgage debt. Some people in this situation prefer to buy life insurance to pay the mortgage off so that their family home can be passed on to their beneficiaries but you can see that it isn't essential.

It can be more beneficial for a single person to protect their ability to earn as this is essential if you are to keep paying your mortgage payments. People with or without dependents can benefit from Income Protection, a policy that covers your income in the event that you are unable to work due to an accident or sickness. Critical illness insurance can also be a sensible purchase as it will pay out a lump sum if you're diagnosed with a very serious illness like cancer, stroke or heart attack.

Do I need mortgage life insurance if I have children?

If you have children or a partner who depends on you or if you own a property with other people, it is a good idea to consider life insurance to cover your share of the mortgage balance as they may want to carry on living in it. You can choose a life insurance amount so that the payout would either clear or reduce the mortgage balance to a manageable amount for those left behind.

Do I need life insurance for a buy-to-let mortgage?

Many landlords mistakenly believe the rental income on their buy-to-let portfolio will continue to be paid out to their dependents if they pass away, but if you were the only borrower on a buy-to-let mortgage and died, this debt (and the properties) forms part of your estate. All liabilities have to be settled during the probate process before assets can be distributed to your beneficiaries.

How can life insurance be used in estate planning?

Depending on the size of your estate (all of your assets minus your debts and liabilities), there may then be an inheritance tax that becomes payable before your beneficiaries can receive anything. This is where you can be smart about how you arrange your life insurance to minimise your inheritance tax bill. You have two choices about how your life insurance is paid out and they will have different impacts on the way that the value of your estate will be calculated and can potentially reduce the amount of inheritance tax that will be payable.

	The way the value of your estate and potential inheritance tax is calculated
Life insurance without a trust	If you die the money will be paid into your estate and it will inflate the value of your net estate and in turn could increase the inheritance tax due
Life insurance with a trust	If you die the money will be paid into the trust and distributed through the trust to your nominated beneficiaries without being added to your estate so you may end up paying less inheritance tax whilst making the same financial provisions. Your beneficiaries can use the monies received through the trust to settle the affairs of your estate without increasing the inheritance tax bill.

Life insurance, when put in a trust could mean that your beneficiaries are able to receive monies to pay off your mortgage or reduce the outstanding balance of your mortgage against your buy-to-let property so that they can continue to receive the rental income generated. A specialist life insurance adviser* can help you to set up the trust at no extra cost.

What type of life insurance do I need for a mortgage?

Some life insurance policies are specifically designed to suit the repayment of a mortgage in the event that the insured person dies. If you don't have a mortgage, you may still need life insurance and some of life insurance plans will cover more than one need. You will find life insurance policies that are multi-use and can cover your mortgage adequately too. We describe the different types of life insurance you need for a mortgage below.

Level term life assurance

This is the type of life insurance that you'll normally need if you have an interest-only mortgage. Interest-only mortgage balances don't reduce because the mortgage payer is only ever paying the interest accruing against the amount that was borrowed. A level term life insurance can also be suitable for someone who wants a flat amount of life cover so that the money can be used for the mortgage or any other financial needs that might arise.

Decreasing life insurance

Decreasing life insurance is also referred to as mortgage life insurance, reducing life insurance or mortgage protection but essentially these are the same product called by different names for a reducing type of mortgage life insurance where the cover reduces over the number of years the policy runs. The amount of your life insurance reduces gradually in the same way that the balance of a repayment mortgage will reduce - slowly in the early years and faster as you get towards the end of the mortgage term.

Decreasing life insurance that reduces alongside your mortgage balance is usually cheaper than a level term life insurance where the policy covers a set amount of money which will be paid out whether you die in the first or last year of the policy. Decreasing life insurance is only appropriate if you are trying to cover your repayment mortgage and you do not need to provide any more money than what is needed to repay the mortgage balance.

Family income benefit

This type of life insurance is designed to pay an income instead of a lump sum. If the person who is insured dies, the policy starts paying an income which will continue until the end date of the policy. It can be a more manageable way for people to keep paying their mortgage payments and even other bills if the worst happens. It can cost less as well due to the decreasing risk of a large payout as time goes on. It won't provide a lump sum of money that the people in your life might need so sometimes it is sensible to buy this type of life insurance policy alongside a policy that pays a lump sum to complement it if needed.

Decreasing mortgage life insurance v Level-term mortgage life insurance

It is important to note the differences between level-term life insurance and decreasing mortgage life insurance to work out which will be more suitable for you.

Type of life insurance	Pros	Cons
Mortgage/decreasing term assurance	Cheaper than level term assurance for the same amount and number of years of cover Will cover your remaining balance if you die as long as the amount and term of the mortgage and life insurance match at the outset	If you remortgage and change the amount and/or term of your mortgage it may be difficult to top up Death in the later years of the policy will result in a much smaller payout than level term assurance
Level term assurance	The amount of cover remains the same throughout the term Covers an interest-only mortgage where the debt doesn't reduce Provides as much cover in the later years of the policy as it does at the start If you have a repayment mortgage and choose level term cover you will have more cover than you need for the mortgage as time goes on that can be used by your beneficiaries Easier to top up if you increase your mortgage	It is more expensive than mortgage/decreasing term assurance although the difference can be very little at the lower end of monthly premiums

Do you need Income Protection insurance to get a mortgage?

No, there is no legal requirement to buy income protection insurance although it is a policy that everyone should consider when buying a house. Income protection policies are much more likely to be claimed against than life insurance due to the higher likelihood that you may become incapacitated to work during your mortgage term.

An income protection policy provides a monthly tax-free payment if you are unable to work and can ensure that you are able to keep up the monthly repayments on your mortgage. You can read more about it in our article, "Income protection - do you really need it?"

Mortgage payment protection insurance

There is a product called mortgage payment protection insurance which is an insurance policy that just covers the cost of your monthly mortgage repayments should you become too ill to work. It usually only covers your mortgage payments for up to 12 months whereas income protection insurance can cover you until the mortgage is repaid. In instances where a person is not healthy enough to qualify for income protection, they may choose mortgage payment protection insurance on the understanding that most pre-existing health conditions are usually excluded from claims.

How to decide which is best for you?

There are plenty of factors that will determine what sort of life cover is best for you. If you have a mortgage and dependents, it is worth considering mortgage life cover so your loved ones can go on living in the property with the debt paid off if you pass away. But if you can get large enough life cover for the mortgage debt as well as any other living expenses, this may also be sufficient to ensure your family is looked after.

The monthly premium will depend on your age, occupation, lifestyle, and health, as well as the provider you use, but generally, it can cost as little as a few pence per day. Normally, your monthly premium will stay the same for the duration of your policy and won't change each year as you would experience with other general insurances such as home and contents insurance.

Remember, life insurance will usually only cover death and there are other sorts of cover such as mortgage payment protection insurance, critical illness and income protection that can provide payouts to cover a mortgage and other expenses if someone is unable to work either permanently or temporarily. This will depend on certain conditions and exclusions.

It is also worth checking the benefits offered by your employer as some companies offer death-in-service benefits or pension payouts if someone dies while employed.

A financial adviser or life insurance specialist can help navigate all these scenarios and put a plan in place to ensure your mortgage can be covered in the event of death. It is worth consulting a specialist life insurance broker to compare mortgage life insurance quotes* as they will be able to recommend the best policy (or policies) for you based on your circumstances and health. Simply click on the link to complete the short form for a callback at a time that suits you. Additionally, if you take out a policy you will qualify for up to £100 cashback.

 

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch