Life insurance to pay off mortgage

Life insurance that pays off a mortgage

Although getting a mortgage can be a cause for celebration, it can also feel like a worrying financial undertaking. It will undoubtedly be most people's largest form of debt and usually spans 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 specific type of life insurance policy that is designed to 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 provides cover in case you die before your mortgage is repaid – it can include illness cover as well but we'll come to that. Mortgage life insurance can be arranged as single life cover or joint life cover depending on how many people are responsible for repaying the mortgage loan. The main purpose of mortgage protection insurance is to provide a payout that is a tax-free lump sum of money which 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. Life insurance for a mortgage 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.

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 cover 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 term 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. It is quite simple to add critical illness cover to life insurance so that you are protected against either serious illness or 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.

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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

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

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

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

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

Who needs mortgage life insurance?

Anyone with a mortgage should consider buying life insurance, especially those who 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 entirely for your and your family's benefit, but your circumstances will determine if you should buy mortgage life insurance and how much of the mortgage you 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.

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 through illness or injury. 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. You could end up paying higher premiums than you need to if you select the wrong life insurance company because each company uses different risk guidelines – some insurers could increase the cost of your life insurance due to your health or lifestyle whereas another life insurance company would not. The guidance you receive from a life insurance specialist can prevent this by selecting the best life cover for your personal circumstances.

You should also consider putting your mortgage life insurance policy in ‘trust'. What this means is that you nominate who should receive the money if a claim is made if you die. The key benefit of this is that your family will have access to the money without delay. Your mortgage life insurance payout will, otherwise go into your estate and your family may have to wait for probate to take place before they are able to access the money. In the meantime, they will usually have to keep making mortgage payments which could cause financial strain. A life insurance specialist will put a mortgage life insurance in ‘Trust' without any charge and it has the added advantage of minimising inheritance tax.

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 from. 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.

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