While it is not compulsory to have life insurance in place to get a mortgage it is advisable. No-one likes to think about death, but how would your family cope with the bills and general living expenses if you were to die?
A mortgage is most likely the biggest expense you will leave behind. It is possible to get your mortgage debt covered cheaply by life insurance, but here is what you need to consider.
When do you need life insurance?
If your family or your dependents rely on your income, consider how they would cope if you were gone. That is where life insurance comes in. A life insurance policy can pay a lump sum or regular payments to your dependents if you die.
This means the big expenses such as childcare, household bills and even your mortgage can be covered, providing reassurance that your dependents won't struggle financially if you die.
Is life insurance necessary when buying a house?
Despite what your mortgage lender may tell you, the only insurance you require when purchasing a property is buildings insurance. This gives the lender certainty that the property they are lending against is protected and will exist at the end of the mortgage term.
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 critical to have either policy in place when buying a house.
Do I need life insurance to cover my mortgage if I live alone?
In some cases, such as if you are single and have no dependents, a lender will force your estate to sell your property once you die, repaying the mortgage, so there would be no need to have cover in place. A more sensible product to consider in this case would be Income Protection, a policy that covers your income in the event that you are unable to work due to accident or sickness.
Do I need life insurance to cover my mortgage if I have children?
But if you have dependents such as a partner or children or own a property with other people, it is a good idea to consider life insurance when taking out a mortgage as they may want to carry on living in it. The life insurance payout would clear (or reduce) the mortgage on the property. Also, a lender may also rate your application more highly if they know you plan to or have previously had the protection in place as it will show that the loan can still be repaid even if a borrower passes away.
Do I need life insurance on a buy-to-let property?
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. There may then be inheritance tax to pay, which could result in the properties having to be sold to pay the tax bill. Instead, you could take out life insurance to cover the buy-to-let mortgage that would pay it off once you die, and that way your family can continue to benefit from the rental income.
Do I need life insurance if I don't have a mortgage?
A mortgage is likely to be your biggest monthly expense but you may have other financial commitments such as childcare costs that can run into thousands of pounds a month. It is worth seeking financial advice and working out whether you would have enough savings in place or if you or your partner could survive financially if one of you was no longer around.
In all these examples, whenever you take out life insurance you should also consider putting it into trust. This sets out who the payout should go to and excludes the amount from your estate, which should reduce any inheritance tax liability.
Remember, you don’t just have to take life insurance that is offered by your mortgage lender. Often the adviser at your mortgage lender will be tied to a limited range of providers, so it is worth shopping around and speaking to an insurance specialist who can look at a range of products and find the best/cheapest product for you based on your health and financial circumstances. They can also help you with more complicated matters, like the aforementioned trust forms.
Do you need Income Protection insurance to get a mortgage?
No, there is no legal requirement to take out income protection insurance although it is a policy that everyone should consider when buying a new property. In a recent article, we highlighted that over 80% of people could risk losing their home if they were unable to work due to ill health. 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. Read our article and findings by clicking on the link above.
Life Insurance vs Mortgage Life Insurance vs Mortgage Protection Insurance
There are a few options if you want life insurance to cover your mortgage:
First there is the standard life insurance policy. You can get a term life policy, that runs for a set number of years and will pay a set amount if you die during that period.
However, if you live longer there is a risk that you won’t have any cover when you pass away or may need to pay more for a new policy, so you need to work out which is most suitable for you. This may depend on your age, health and lifestyle.
'Whole of life'
Alternatively, you could get a whole-of-life policy that pays out no matter when you die, as long as you keep paying the monthly premiums.
A payout from these sorts of cover can be used to pay off any debts, but you can also get specific mortgage life insurance. This is linked to the value and length of your mortgage and agrees to pay out the equivalent sum if you die during the term.
Mortgage life insurance
Mortgage life insurance is typically sold as decreasing term cover, meaning the payout falls as the debt is paid off. This means your monthly repayments will usually be cheaper as the cover reduces. If you have an interest-only mortgage it would be advisable to buy mortgage life insurance on a level term basis (i.e the sum assured remains constant throughout the life of the policy) so it can repay the mortgage debt in full.
There are also life policies that are inflation-linked and increase the amount to cover rising living costs.
Mortgage life insurance v level term life insurance
It is important to note the differences between life insurance and mortgage life insurance. A payout from life cover can be used to pay off any debts including a mortgage, but mortgage life insurance will only pay off the home loan.
Mortgage life insurance tends to be cheaper than life cover as it typically runs for a shorter term and the amount covered falls each month. Life cover can also be offered as a single or joint policy. If you are married it is typical to only consider joint life cover as it tends to be cheaper, but there is only one payout when a partner dies which would leave the surviving spouse without ant life cover.
Mortgage payment protection insurance
Finally, there is mortgage protection insurance which is an insurance policy that just covers the cost of your monthly mortgage repayments should you become too ill to work. A more comprehensive alternative to mortgage payment insurance is Income Protection insurance as it will cover a set proportion of your income (rather than just the mortgage payment itself) and the benefit period be paid for far longer and in fact can cover you right up until retirement.
For more information on the types of life insurance, check out our article Types of Life Insurance explained.
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 dependants, 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, health, as well as the provider you use, but generally it can cost as little as a few pence per day.
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 £50 cashback.