Do you need life insurance for a mortgage?

To put it candidly, buying a house can be one of the most stressful times of a person’s life, but at the same time, extremely rewarding! With so many variables to deal with, it’s easy to miss important things and get yourself in a pickle. A rather large part of the house-buying process is the mortgage, and inexperienced buyers may not understand how life insurance may (or may not) fit into it.

So, we’re going to break down on all things related to mortgage life insurance.

What is mortgage life insurance?

Let’s start with the basics: Life insurance is a type of insurance policy that people take out to provide a sum of money to their loved ones when they pass away. Usually people opt to take life insurance out over a fixed term (you sometimes hear such policies described as ‘term life insurance’), however there are Whole of Life policies with no fixed term – which you can read more about here. 

Whole life insurance pays out a cash lump sum when you die. This money can be used to help your family pay-off the remaining balance on your mortgage and any other costs they may struggle to cover.

Life insurance is a great way to protect your loved ones from financial burdens that may come their way after you pass away. There are various types of life insurance designed to cover your family if the worst should happen, whether it be paying your funeral costs, helping maintain your family’s standard of living or leaving money for your children’s education.

How does mortgage life insurance work?

Mortgage life insurance works exactly the same, with people commonly taking out term life insurance for the duration of their mortgage. So although it isn’t compulsory, you should consider life insurance for your mortgage. Your mortgage is likely the most expensive thing that you’ll leave behind, so it makes sense to cover your family from it when you pass away. 

Why do I need life insurance for my mortgage?

As mentioned before, having life insurance for your mortgage is not mandatory, but it is highly recommended. When you first purchase your house, you will usually owe the mortgage lenders thousands of pounds, which you will pay off in monthly installments. However, if you pass away before the mortgage is paid off, the lenders will turn to your partner if you are in a joint mortgage.

Mortgage life insurance prevents your partner from having a huge financial burden on their shoulders by paying off your mortgage debt. This way, your loved ones will have peace of mind that they will be able to maintain their lifestyle without the risk of losing their home.

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Is mortgage life insurance necessary for single homeowners?

If you are a single homeowner without any dependents, it’s not necessary to have life insurance for your mortgage. Your mortgage lenders will likely repossess the property once you pass away and auction the property to recoup the money owed. 

Although life insurance may not be applicable, products such as income protectionor critical illness covercould be highly valuable to protect your income and mortgage payments in the event of serious illness or injury.

The types of mortgage life insurance

  • Single or joint: A single policy for you will ensure that your life is covered for, however your partner would have no cover in place. On the other hand, a joint policy will cover both you and your partner. Essentially, if you are a couple you have two options, get a single life policy each or one joint policy? We’ll get to this later.

  • Decreasing term or level term: Over time, your mortgage will decrease as you pay it off, this means the amount of cover you need is reducing every month. Decreasing term life insurance takes this into account. On the other hand, a level term insurance policy will not decrease over time, which is well suited if you have an interest-only mortgage.

How much does mortgage life insurance cost?

Like all types of life insurance policies, there are several factors that may impact the cost of mortgage life insurance such as:

If you want to get more of an idea of how much you may be paying, then feel free to contact us.

 Should I have two single policies or a joint one?

If your mortgage is in joint names, then it is typically slightly cheaper to have a joint life insurance policy rather than two single policies. Joint policies usually work on a ‘joint life first death’ basis – paying out the policy benefit to the surviving policyholder in the event of one of you passing away. The surviving policyholder would no longer be covered as the policy would then cease upon payout. 

Another option would be to take out separate policies. Whilst this is often very slightly more expensive, you are essentially purchasing double the amount of cover compared to a joint life first death policy and should a claim be made the surviving partner would retain their life cover. 

What is critical illness mortgage cover?

Critical illness cover is another benefit that can be purchased alongside life insurance policies. In the case of mortgage cover with critical illness included, if you fall seriously ill with one of the critical illnesses covered by the insurer you will be able to claim on your policy to either maintain your mortgage payments or pay off your mortgage entirely. Read more about critical illness cover.

Where can I buy mortgage life insurance?

There are multiple avenues you can take to find the right deal for you and we’re here to help. Give us a call on 01392 436 193 orfill in our contact form and we will give you the help you need!

How long should I make my policy term?

You can choose how long you would like your policy to cover you for in whole years.

For instance, if you are looking to cover a 25 year mortgage, you could select a policy term of 25 years.

If you are unsure of what policy term is appropriate for your needs, call us on  03456 442 540 (Monday - Friday 9am - 5pm) and speak to an adviser who can help.

Products & Services from the leading financial brands

  • Zurich
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  • LVE
  • Royal London
  • Vitality Life
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  • Budget Insurance
  • Scottish Widows

Do I have to take out life insurance through my mortgage provider?

It is not necessary to go with your mortgage provider for your life insurance policy, and in many cases, this can turn out to be more expensive. Discount Brokers like ourselves at Cavendish Online will often be the cheapest route to buy life insurance for your mortgage. 

What happens to life insurance when mortgage is paid?

Paying off your mortgage does not affect your life insurance policy. The policy remains active until the term expires, you cancel it, or you pass away. If you were to pass away within the term, your beneficiaries will receive the payout. If you survive the term, then there is no payout at the end of your policy.

Is life insurance tax-free?

In most cases, life insurance payouts are not subject to tax. However, your policy is considered part of your estate - therefore it could be liable to inheritance tax. According to government guidelines, your estate will be taxed if the value exceeds the government threshold.

If the value of your estate exceeds the threshold, then the payouts from your life insurance policy may be subject to inheritance tax. However, you can avoid this by writing your policy in trust. This way, the life insurance policy belongs to the trust and not your estate, avoiding inheritance tax.

A summary of mortgage life insurance

To summarise, below is a few good reasons to consider  mortgage life insurance.

  • Your mortgage will be paid off in full once you pass away

  • May be cheaper than you think

  • A great choice of products and insurers

  • Additional cover such as ‘critical illness’ can add valuable peace of mind if you choose to add it

  • Your family are protected from financial difficulty if you passed away

Be sure to contact us if you have any other questions as the Cavendish Online team will be more than happy to help!