Do I need life insurance for a mortgage?

Why would you get life insurance with a mortgage?

Buying a home with a mortgage is a big commitment – you're borrowing tens or likely hundreds of thousands of pounds.

If the worst happened to you, could your family afford to pay the mortgage?

Life insurance can make sure your dependants can stay in the property after you die, without it needing to be sold to cover mortgage costs.

Here we explain how it works and how to get the best deal.

• Find out more: Best life insurance quotes compared

Looking to buy life insurance?

Find the right life insurance policy using the service provided by LifeSearch.

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How does mortgage protection life insurance work?

Mortgage protection life insurance is another name for term life insurance.

The term (length of cover) is set to the same as the mortgage – say, 25 years – and the sum insured is set to match the amount borrowed. This means that there will be enough money to pay off the mortgage if you die before the end of the term.

Mortgage protection insurance is usually decreasing term life insurance. 

Decreasing term insurance gets its name because the amount paid out decreases throughout the term. In the case of repayment mortgages, this is designed to match the repayment of the debt. 

As you pay off the mortgage over years, the amount you owe the lender gets smaller, so if you died before the mortgage term has ended, the sum needed to cover it is lower.

The money is paid to your estate, not direct to the mortgage company, though it can be left in trust.

• Find out more:What is life insurance?

What types of life insurance are used for mortgage protection?

The type of life insurance policy you should get depends on the type of mortgage you have:

Note that level term life insurance is more expensive than decreasing term. 

If you have savings, or another way to pay off the mortgage, then you won't need the life insurance sum to be fixed, and you could opt for decreasing term cover.

Life insurance can pay out a lump sum – to clear your outstanding mortgage entirely – or as family income benefit in monthly payments. 

• Find out more: Income protection insurance explained.

Joint mortgages

You can buy joint life insurance with someone else, or have two or more separate policies. 

If you have a joint mortgage, both of you should have life insurance, either jointly or separately. Insurance broker LifeSearch says it recommends a Joint MPA in this instance, unless considering Level Term Assurance where they would recommend separate policies.

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Remortgaging and second mortgages

If you borrow additional money, by remortgaging your existing home, taking a second mortgage or to buy a new home, you'll need to get life insurance to match the new debt. 

This could mean buying additional life insurance or cancelling your old policy and buying a new one.

Never cancel a policy without having secured a replacement first.

• Find out more:What is whole-of-life insurance?

Do you need life insurance to get a mortgage?

You do not have to have life insurance in place to get a mortgage. 

However, it is sensible to have life insurance in place by the time you activate the mortgage. 

Mortgage providers may offer to arrange this for you, but you can buy your life insurance from elsewhere and may get a better deal if you do.

• Find out more:Can you have more than one life insurance policy?

How does mortgage life insurance work?

Life insurance pays out if you die during the term of the policy. The money goes to your next of kin or your estate. 

They can then use it to pay off the mortgage and your home can be passed on to family or friends. There is no tax on a life insurance payout when written in trust.

The amount of life insurance you need should be enough to match the amount borrowed on the mortgage and the length of time you need cover – the term – should match the length of your mortgage.

Most people have a repayment mortgage, which pays off the debt over time. In this case you would buy decreasing term life insurance, which is cheaper. The decreasing amount paid out over time would still be enough to clear your mortgage debt.

How much is mortgage life insurance?

There is no fixed price for mortgage life insurance. Premiums are based on your age, health and lifestyle. 

The older you are, the more expensive life insurance becomes. Any significant pre-existing medical or other health conditions that increase the risk of you dying early will also increase premiums. 

Your lifestyle choices, such as smoking, high alcohol consumption and even dangerous sports or motorcycling, can push up premiums.

You will need to make an honest declaration about all these issues and your GP will be asked to confirm your medical conditions. In unusual circumstances, you may require further medical examinations before a premium can be quoted.

It is possible to get non-medically underwritten life insurance, but this is restricted to lower sums insured and is more expensive.

• Find out more:What types of life insurance works for over 50s?

What are the disadvantages of mortgage life insurance?

Mortgage lenders used to bundle life insurance up with their loan, even adding the cost of the life insurance into the loan. 

These were rarely good value policies. It is always recommended that you at least shop around and consider buying life insurance separately. 

Life insurance policies do not have standard wordings. Some have exclusions, or make claiming harder if you develop a terminal illness. That means it's not just about price, so you need to find the policy that suits your needs.

Each insurer has its own likes and dislikes, so if you have a dangerous hobby or a rare illness, you might find half the market isn't prepared to offer you life insurance at all.

You may find a specialist life insurance broker can find cover for you at a better price.

What is the difference between life insurance and mortgage life insurance?

Mortgage life insurance is a description of term life insurance when the purpose is simply to pay off a mortgage debt and not to leave additional funds for relatives. 

It is the same product and works in the same way.

• Find out more:joint vs single life insurance - the pros and cons of each

Do you need life insurance once your mortgage is paid?

Many people have additional life insurance, either alongside their mortgage protection life insurance or continuing after the mortgage is paid off. 

With couples having families later – sometimes in their 40s – people may have paid off their mortgage but still have young children to think of. They then have life insurance in place should they die.

Some high-net-worth individuals take out life insurance to cover the inheritance tax the family will have to pay on their estate. 

And many people set up their life insurance so it pays out to a trust, which helps with tax and may speed up access to the money if paid out.

There can be many reasons why you might want to have life insurance after you have cleared your mortgage.

What other insurances should you take out with your mortgage?

Mortgage lenders will require you to have buildings insurance.

This covers the cost of repairs or rebuild in the event of accidental damage to your home, plus any public liabilities that arise from your property – for example, your front wall falls down and injures a passerby or damages a neighbour’s parked car.

Crucially, it will cover the cost of rebuilding your home if it's completely destroyed. Without it, you'd have nowhere to live and still have a mortgage to pay.

Contents insurance is also highly advised.

This covers your possessions inside the home, including fixtures and fittings, furniture and upholstery, and even your clothes and jewellery. 

It can also cover bicycles and mobile phones away from home, if you list them as all-risk items. If you have a garage or shed, the contents of these can be covered, too.