Life insurance to pay off mortgage

20 min Read Published: 21 Jul 2022

Life insurance to pay off mortgageLife insurance that is designed to pay off the remainder of your mortgage if you die can be vital in some circumstances and desirable in others. In this article, I will explain who needs mortgage life insurance, how mortgage life insurance works, how to choose the right type of mortgage life insurance and what mortgage life insurance costs.

Mortgage life insurance can help to ensure that your home isn't repossessed if you die and means that the burden of paying off the remainder of your mortgage repayments isn't passed onto someone else. There are ways to secure your home in the same way if you become seriously ill and we go on to explain that later in this article.

1 min summary - Life insurance to pay off mortgage

  • There are different types of mortgage life insurance and it is important that you choose the right type for your own circumstances.
  • Consider whether you need to cover the whole mortgage and who will be left to pick up the pieces. Also consider whether you need other types of cover such as critical illness insurance which pays out if you are seriously ill
  • The quickest way to find the best and cheapest mortgage life insurance policy & get up to £100 cashback is to complete this simple form* & get free advice from an independent life insurance expert.

Life insurance that pays off a mortgage

Although getting a mortgage can be cause for celebration, it can also feel like a worrying financial undertaking. It will undoubtedly be most people's largest form of debt and one that usually spans over your entire working life and sometimes beyond. This is why it is wise to put some security in place in the form of mortgage life insurance just in case life takes some unexpected turns.

Life insurance that pays off your mortgage if you die can provide great peace of mind for couples and families. Single occupant homeowners with a mortgage may worry less about such an event as the house can ultimately be sold with the proceeds of the sale helping to repay the mortgage.

What is mortgage life insurance?

Mortgage life insurance is a personal insurance policy that will pay out an amount of money, usually in the form of a tax-free cash lump sum that can pay off some or all of your outstanding mortgage debt if you die.

How does mortgage life insurance work?

Mortgage life insurance covers your life against death (it can include illness cover but we'll come to that) and pays out if you die whilst the insurance is in place. It usually pays a tax-free lump sum of money that can be used to repay the mortgage and secure your home against repossession.

Most people will choose to cover the entire amount of their mortgage balance but some may choose to cover a portion of it. Mortgage life insurance usually insures an amount that is equivalent to the amount you have borrowed against the mortgage. The policy should also run for the same number of years as those you have taken your mortgage over. Some people may choose to insure part of the whole mortgage balance if they feel that their partner or family could manage the remaining balance in a worst-case scenario. There are different types of mortgage life insurance and depending on whether your mortgage is arranged on a repayment basis (capital and interest) or on an interest-only basis will determine which type will suit you best.

Who needs mortgage life insurance?

Anyone with a mortgage should consider buying life insurance, especially those that worry about burdening those that they leave behind with debt. Mortgage life insurance cover is not a mandatory purchase because the mortgage lender can repossess and sell your home to recoup the debt if you die. It is in fact entirely for your own and your family's benefit but your circumstances will determine if you should buy mortgage life insurance and how much of the mortgage you may wish to cover. Below we look at some common scenarios to get you thinking about your own situation.

Should you buy mortgage life insurance?

There are a number of reasons why you should buy mortgage life insurance and the decision is ultimately yours. As we explained earlier, your mortgage lender can always repossess and sell your house to recoup the mortgage debt if it becomes necessary. Below we provide a number of reasons why you would consider getting life insurance using a number of scenarios.

Living situation Should you buy mortgage life insurance?
A solo person living in a mortgaged home alone with no dependents
  • Unlikely to need it but may want it
  • Provides security for a partner or dependents you may have in the future
  • Could pay off your mortgage so your home could be left to a beneficiary of your choosing
  • Illness and injury cover is usually the priority in this situation
Two people living together in a mortgaged home with no dependents
  • May need it and want it
  • Covering the entire amount of the mortgage individually or jointly would mean that if one person died, the other would be mortgage free
  • Covering a portion of the mortgage each split according to how much you contribute could mean that if one died the other was only left with an amount of mortgage they could financially manage
One person living in a mortgaged home with dependents
  • Very likely to need it and want it
  • Covering the entire mortgage will ensure that the home becomes an asset for your dependents
  • Nominated guardian(s) for the dependents can access the home to release funds to support their living costs or move into the home to maintain it without having to pay the mortgage payments
Two people living together in a mortgaged home with dependents
  • Likely to need it and want it
  • Covering the entire mortgage amount individually or jointly will allow the home to be secured in case one person dies.
  • Extra cover is usually needed to provide for living costs beyond the mortgage
  • Even if both people are working and financially contributing to the mortgage, if one dies, the other may wish to reduce or give up work to be with children

Choosing the right type of mortgage life insurance

There are two types of mortgage life insurance that you can buy:

  • Level term life insurance – it pays out if you die during the years of cover this is called the ‘term') and the amount paid out is the same throughout the term
  • Decreasing / Mortgage life insurance – it pays out if you die during the term but the amount that is paid out reduces each year in line with your mortgage balance. This means that a decreasing mortgage life insurance policy pays out more money if death happens during the early years of the policy and less towards the end.

A life insurance product that is called mortgage life insurance, is usually a decreasing type of life insurance but you should check the terms of cover as this will indicate whether the amount of cover will decrease over the years or remain level.

Which type of mortgage life insurance do I need?

The type of mortgage life insurance that will suit your needs will depend on your type of mortgage. Below are the two main types of mortgage and which types of life insurance will suit each.

Interest only mortgage

If your mortgage is being repaid on an ‘interest only' basis, the balance of your mortgage debt will remain the same because your monthly payments are only paying the interest that accrues and not the capital that you borrowed.

Level term life insurance is the most appropriate type of life insurance to cover an interest-only mortgage so that the amount of cover remains level to match the outstanding balance.

Repayment mortgage

If you have a repayment mortgage, you can choose between a level or decreasing life insurance policy type. Decreasing life insurance will only ever cover the outstanding balance of your mortgage because the amount of cover reduces as your mortgage balance reduces. A level life insurance policy will pay out the level of cover you chose at the beginning, even if you're into your last year of the policy. This means there may be a larger amount paid out for death than what is outstanding on the mortgage balance. The residual death benefit can be passed on to your dependents or chosen beneficiaries.

Mortgage life insurance with critical illness cover

You can cover your mortgage debt in case you suffer a serious illness as well as death. With life expectancies increasing, most people are likely to live beyond the term of their mortgage but with cases of serious illness such as cancer, heart attacks and strokes on the rise, many will need financial support in these events. You can read more about critical illness cover in our article, “What is critical illness cover?

How does mortgage life insurance with critical illness cover work?

Mortgage life with critical illness cover is insurance that will pay a lump sum of money if either you die or suffer a serious illness. If you are diagnosed with a serious illness, a lump sum payout could alleviate financial stress so that you can focus on treatment and recovery.

How much critical illness cover do I need for my mortgage?

The amount of life cover and serious illness cover does not have to be equal – you can choose to be covered for different amounts and this is often what people choose because critical illness cover costs around five times as much as life cover. Your budget will help you to decide the level of cover that you choose and we have shared some example costs for life and critical illness cover below.

How much does mortgage life insurance cost?

Mortgage life insurance costs will vary based on your:

  • age
  • smoking habits
  • health
  • lifestyle
  • mortgage amount
  • mortgage term

Your quoted cost of mortgage life insurance will be based on your age, smoker status, amount of cover and the term you want to be covered. However, that price can change after you complete an application which will assess your health and lifestyle. Below, you will find the quoted price of life insurance on a level basis, reducing basis and with critical illness cover. Smokers will pay more for life insurance so we have laid out non-smoker and smoker prices – you can qualify for non-smoker prices if you have had no nicotine or tobacco for at least 12 months.

Cost of £200,000 of mortgage life insurance over 25 years for a non-smoker

Age  Monthly premium for decreasing life insurance (for repayment mortgage only) Monthly premium for level life insurance (for interest-only or repayment mortgage)
25 £4.45 £5.84
35 £6.17 £9.27
45 £13.81 £20.83
55 £36.02 £57.31

Cost of £200,000 of mortgage life insurance over 25 years for a smoker

Age  Monthly premium for decreasing life insurance (for repayment mortgage only) Monthly premium for level life insurance (for interest-only or repayment mortgage)
25 £6.36 £8.14
35 £11.55 £18.63
45 £30.92 £49.84
55 £91.99 £135.33

Cost of £200,000 of mortgage life and critical illness insurance over 25 years for a non-smoker

Age  Monthly premium for decreasing life insurance (for repayment mortgage only) Monthly premium for level life insurance (for interest-only or repayment mortgage)
25 £24.17 £38.50
35 £46.05 £73.05
45 £97.84 £170.77
55 £176.68 £286.66

Cost of £200,000 of mortgage life and critical illness insurance over 25 years for a smoker

Age  Monthly premium for decreasing life insurance (for repayment mortgage only) Monthly premium for level life insurance (for interest-only or repayment mortgage)
25 £30.66 £47.07
35 £69.92 £108.61
45 £181.28 £279.75
55 £343.63 £520.67

All the above premiums are based on a person who has no adverse health or lifestyle risks and the premiums are guaranteed to remain the same throughout the 25-year term

Is mortgage payment protection the same as mortgage life insurance?

No, mortgage payment protection usually only covers your monthly mortgage payments if you can't work due to an accident or illness whereas mortgage life insurance pays a lump sum of money to pay off the outstanding amount on your mortgage if you die. Mortgage payment protection insurance can also include redundancy protection which is also known as unemployment cover so that your mortgage payments are protected for up to 12 months if you are made involuntarily redundant.

Do I need mortgage payment insurance?

Possibly, but before you decide you should check your sick pay at work and work out how long you'd manage to keep paying your mortgage payments if you become unable to work. Mortgage payment protection insurance can prevent you from falling behind with your mortgage payments but is normally limited to 12 months of payments.

If you're concerned about meeting your financial commitments in case you fall ill or have an accident and can't work, you should look at income protection insurance which is a more comprehensive type of incapacity insurance that can be tailored to support you around your sick pay and budget. You can read more about it in our article, “A guide to income protection insurance

How to buy mortgage life insurance

Often, your mortgage broker will be the first person to explain the benefits of life insurance for your mortgage and most mortgage brokers will be able to arrange life insurance for you when they arrange your mortgage. Like any other service provider, mortgage brokers can provide varying degrees of expertise and access to the best insurance policies at the best price. If you're thinking of buying life insurance with your mortgage, we suggest you read our article, “Should you buy life insurance through a mortgage broker?

In fact, you can buy mortgage life insurance through a comparison website, your mortgage broker, your bank or through a life insurance specialist. Comparison websites can give you a good idea of initial costs but they don't steer you to the insurance companies that may provide more benefits, have fewer exclusions or are simply cheaper and better for your particular circumstances.

What is the best way to buy mortgage life insurance?

The best way to buy mortgage life insurance is by speaking to a life insurance specialist*. Specialist life insurance brokers can access a wider range of policies from across the entire life insurance market and often they understand the small print better than most so you can be reassured that they will make recommendations based on your particular circumstances.

We have partnered with LifeSearch, a specialist life insurance broker that leads the market in providing life insurance advice. The service that we tried and tested includes a search for the best prices as well as guidance on which types of life insurance and illness insurance to choose. The advisers at LifeSearch will consider your whole situation including any existing life insurance you may have and wish to keep.

As a Money to the Masses reader, you can get up to £100 cashback if you buy your mortgage life insurance this way.

 

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. This 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