Mortgage life insurance – What is it and do you need to have it?
In this article we take a look at mortgage life insurance (sometimes referred to as decreasing life insurance) and explain what it is, what it covers you for and whether you actually need it. Additionally, we will look at what impacts the cost of mortgage life insurance and the best and cheapest way to buy it, including how to get £50 cashback.
What is mortgage life insurance?
Mortgage life insurance is a type of life insurance policy that, should you die, guarantees to pay off the outstanding balance on your mortgage. There are two different types of mortgage life insurance which we explain in more detail below, as well as which policy is best depending on what type of mortgage you have.
Decreasing term life Insurance - Best for repayment mortgages
A decreasing term life insurance policy is the most popular type of mortgage life insurance policy as it is designed to sit alongside a repayment mortgage. You can take out a decreasing term insurance policy at any time (not just when you first take out a mortgage) however most people tend to take it out when they buy a new property or when they take out a remortgage on their existing property.
With a decreasing term life insurance policy the amount you are insured for reduces each year in line with your repayment mortgage. So, if you were to die during the term of the policy, a decreasing term insurance policy would only pay enough money to cover the outstanding mortgage. Decreasing term life insurance is cheaper than level term insurance.
Level Term Insurance - Best for interest-only mortgages or for those who wish to have a little extra life cover
Level term insurance is a life insurance policy that remains level throughout the term of the policy. This means that it does not reduce each year, so you always know how much money will pay out upon death.
Level term insurance would be a sensible choice for those that have an interest-only mortgage (as the capital does not reduce with an interest-only mortgage). This would provide a guaranteed lump sum upon death of the life insured. Level term insurance is also a popular choice for those that have children or any additional non-mortgage related debt.
Those with a repayment mortgage could of course choose to take out a level term insurance plan, knowing that should they die, there is likely to be a surplus amount of money left over once the mortgage is paid off. Level term insurance is a little more expensive than decreasing term insurance.
Is mortgage life insurance compulsory in order to secure a mortgage?
No, you are not legally required to take out mortgage life insurance in order to secure a mortgage although it would be a sensible purchase for most people. You should never feel pressured to buy mortgage life insurance through your mortgage broker or house builder. Make sure that you always conduct a full search of the market to ensure you are getting the best deal. We explain how to guarantee to get the best deal later in this article.
Do I need mortgage life insurance to get a mortgage?
That really depends. If you are buying a house with someone else then it may be sensible to consider mortgage life insurance as it is likely that the surviving partner would struggle to meet the mortgage repayments on their own. Those with children should consider taking out more insurance than just enough to cover the mortgage and we explain more in our article 'Types of life insurance explained'.
If you are buying a property on your own and do not have any children, you may be better off buying a policy that protects your income if you are unable to work, rather than a policy that pays out if you die. Check out our article 'Income protection - do you really need it?'
Which type of mortgage life insurance policy is best?
It really depends. For some people, the best means cheapest, but for others it will be the policy that was easiest to apply for or the policy that has the best claims record. In order to ensure that you are buying the best policy for you, whether that means that it is the cheapest or the easiest one to apply for, you should always speak to an independent specialist so that you can guarantee that you are getting the best policy for you. Many mortgage brokers are tied to one company or a small panel of providers, in which case you will not be able to guarantee that you are getting the very best deal.
While it may be tempting to get mortgage life insurance quotes online through a price comparison site, be aware that they can only provide basic quotes and so cannot provide tailored advice. Your final premium will be based not just on your age and how much life cover you want, but on your health and lifestyle so it is important to get advice as to which is the best insurance company based on your own unique circumstances. This is something an independent specialist can help you with for free.
What is mortgage protection insurance and is it the same as mortgage life insurance?
Mortgage protection insurance is often confused with mortgage life insurance but it is in fact a very different insurance product. Mortgage protection insurance, sometimes referred to as Mortgage Payment Protection Insurance or MPPI for short, is a type of insurance policy that pays a monthly sum if you are unable to work due to an accident, sickness or unemployment. Payments usually only last for up to around 24 months and are capped. Some policies allow you to cover up to 125% of your mortgage costs which means that you can cover some essential bills on top. Mortgage life insurance will only pay out if you die.
Mortgage payment protection insurance isn't very comprehensive and those that end up having to use it often go on to experience financial hardship once the policy stops paying out. Those considering mortgage payment protection insurance should consider income protection as an alternative as the policy can be tailored specifically and the benefit can be paid up until retirement if desired.
What is the difference between life insurance and mortgage life insurance?
Life insurance is a type of life insurance policy where the sum insured remains the same throughout the term of the policy and is often referred to as level term insurance. Mortgage life insurance, often referred to as decreasing term insurance, is a particular type of life insurance policy that decreases over time, often in line with a mortgage.
Should I add critical illness cover to my mortgage life insurance policy and if so, how much?
Many people choose to add critical illness insurance to their mortgage life insurance policy, meaning that if they were to be diagnosed with one of the defined illnesses listed on the policy, the plan would pay off their mortgage in full. There are many critical illness insurance providers in the UK and so it is increasingly difficult to know which policy is best. Don't assume that the company that covers the most illnesses is the company that offers the best cover as the type of illnesses that are covered is often more important. You should also consider the claims history of the company concerned as there is no point buying a policy that is difficult to claim on.
Those that choose not to take out critical illness cover are often put off by the cost, however, many people do not realise that they can tailor the cover and so take out a smaller amount of critical illness cover.
A wise option might be to consider taking out enough critical illness insurance to cover your salary for a year. It is likely to cost you far less and will mean that you have a policy to fall back on should you be diagnosed with a serious illness and struggle to work for a period of time. Check out our article 'How much critical illness cover do you actually need?'
Another consideration is income protection which we have talked about earlier in this article. It will pay a guaranteed income in the event that you are unable to work due to an accident or sickness.
Pros and Cons of mortgage life insurance
- Guarantees to pay off the outstanding mortgage balance if you die
- One of the cheapest forms of life insurance
- Will only pay enough to cover the outstanding mortgage - you will have nothing left to pay towards other debts or a funeral etc
- If you buy a new house or remortgage the existing policy is unlikely to cover the new mortgage or property in full and so you are likely to be underinsured
Where to buy the best and cheapest mortgage life insurance
We have sourced one of the best independent life insurance specialists in the UK (with over 10,000 reviews on review site Trustpilot) where you can speak to a trusted expert who can help guide you on buying the best and cheapest mortgage life insurance policy for your needs. Not only can they guarantee to find you the best and cheapest mortgage life insurance quote they will also help you to complete the application forms, chase the insurance company on your behalf and even give you £50 cashback when you take out a policy with them.
Just click on this link and complete the short form to get started - Compare Life insurance quotes
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