Life Insurance vs Mortgage Life Insurance

Buying a home is a big financial commitment, so it is natural to think about what would happen to the mortgage if you were no longer around.

That is where life insurance and mortgage life insurance can come in. Both can offer financial support if you die during the policy term, but they work in different ways.

In this guide, we’ll explain the difference between life insurance and mortgage life insurance, how each type of cover works, and what to think about before applying.

What is mortgage life insurance?

Mortgage life insurance, also known as mortgage protection insurance or mortgage protection life insurance, is life insurance that is usually set up to help clear your mortgage if you die during the policy term.

It is often arranged as decreasing term life insurance. This means the cover amount reduces over time, usually in line with the idea that your repayment mortgage is also reducing.

For example, if you have a repayment mortgage over 25 years, you might choose a decreasing term life insurance policy over the same period. If you die during the term, the policy could pay out a lump sum that your loved ones could use towards the remaining mortgage debt.

This type of cover can be useful if your main concern is helping your partner, family or dependants stay in the home if you were no longer there to contribute to the mortgage payments.

You can read more in our guide to life insurance for mortgages.

Life insurance vs mortgage life insurance: what is the main difference?

The main difference is the purpose of the cover.

Standard life insurance can be used more broadly. The pay-out can help your loved ones with a range of costs, from household bills to childcare, funeral expenses or other debts.

Mortgage life insurance is usually arranged with the mortgage in mind. The policy term is often matched to the mortgage term, and the cover amount may reduce as the mortgage balance reduces.

Put simply:

• Life insurance can protect your family’s wider financial needs

• Mortgage life insurance is usually focused on helping clear the mortgage

• Level term life insurance pays the same amount throughout the policy term

• Decreasing term life insurance usually reduces over time

• Whole of life insurance can remain in place for life, provided premiums continue to be paid

Neither option is automatically better. It depends on what you want the policy to protect.

How does decreasing term life insurance work?

Decreasing term life insurance is commonly used for mortgage protection.

With this type of policy, the potential pay-out reduces over the policy term. This can make sense for a repayment mortgage because, in theory, the amount you owe should also reduce over time.

For example, if your mortgage balance is gradually coming down each year, you may not need the same level of cover in year 20 as you needed in year one.

Because the cover amount reduces, decreasing term life insurance can sometimes have lower premiums than level term life insurance with the same starting cover amount and term. However, the final cost will still depend on factors such as your age, health, smoker status, cover amount, policy term and insurer.

It is also important to understand that the cover may not exactly match your mortgage balance. The policy will usually reduce at a set rate, but your actual mortgage could change because of interest rates, overpayments, missed payments, remortgaging or changes to your borrowing.

That is why it is worth reviewing your cover if your mortgage changes. For a fuller explanation, you can also read our guide to what decreasing term life insurance is.

How does level term life insurance work?

Level term life insurance pays out the same cover amount if you die at any point during the policy term.

For example, if you take out £200,000 of level term life insurance over 25 years, the pay-out would remain £200,000 whether a valid claim is made in year two or year 22.

This can be useful if you want your policy to do more than cover a repayment mortgage. Your loved ones could use the pay-out for the mortgage, but also for other costs such as household bills, childcare, education costs or other debts.

Level term life insurance may also be worth considering if you have an interest-only mortgage. With an interest-only mortgage, your monthly payments cover the interest rather than reducing the original loan balance, so the amount owed may not fall in the same way as a repayment mortgage.

What about whole of life insurance?

Whole of life insurance can remain in place for the rest of your life, as long as you keep paying the premiums.

This is different from term life insurance, which only runs for a fixed period. Whole of life cover is not usually arranged just to match a mortgage term, although the pay-out could still be used by your loved ones towards a mortgage or other costs.

Because whole of life insurance can pay out whenever you die, it is usually more expensive than term life insurance. It may be more relevant if you want lifelong cover, inheritance planning support or a policy that is not linked to a specific mortgage end date.

As always, the suitability of this type of cover depends on your circumstances and budget.

Do you have to take life insurance through your mortgage lender?

No, you do not usually have to take life insurance through your mortgage lender.

Your mortgage lender may talk to you about protection, and some people arrange cover at the same time as their mortgage. However, you can usually shop around and compare policies from different insurers or brokers.

This matters because the policy offered alongside a mortgage may not be the most suitable or cost-effective option for your needs. It is worth comparing the cover amount, policy term, premiums, exclusions and any optional extras before deciding.

If you are unsure whether cover is required, our guide to whether mortgage life insurance is compulsory explains this in more detail.

Can you get life insurance cover for a mortgage?

In many cases, yes. You can usually apply for life insurance to help protect a mortgage, although the type of cover, cost and availability will depend on your circumstances.

Insurers may consider things like your age, health, lifestyle, smoker status, occupation, the amount of cover you want and how long you want the policy to last. They may also ask medical questions as part of the application process.

The cover you choose should reflect the type of mortgage you have. For example, decreasing term life insurance may be used for a repayment mortgage, while level term life insurance may be more suitable for an interest-only mortgage or where you want the pay-out to remain the same.

Our guide to getting life insurance cover for a mortgage looks at this in more detail.

Is mortgage life insurance the same as mortgage payment protection insurance?

No. The names are similar, but the products are different.

Mortgage life insurance can pay out if you die during the policy term. The pay-out can then be used to help clear the mortgage or support your loved ones financially.

Mortgage payment protection insurance, sometimes called MPPI, can help with monthly mortgage payments for a limited period if you are unable to work because of an accident, sickness or sometimes unemployment, depending on the policy.

Income protection is different again. It can provide a regular income if you are unable to work because of illness or injury, subject to the policy conditions.

Our guide to income protection vs mortgage protection explains the differences in more detail.

Should mortgage life insurance include critical illness cover?

Some people choose to add critical illness cover to a life insurance policy.

Critical illness cover can pay out if you are diagnosed with a serious illness covered by the policy and meet the insurer’s definition. This could help with mortgage payments, household bills, medical treatment costs, home changes or time away from work.

It is important to remember that critical illness insurance is not the same as life insurance. Life insurance pays out if you die during the policy term. Critical illness cover pays out if you are diagnosed with a covered condition during the term and meet the policy criteria.

Some combined policies only pay out once. This means that if you make a valid critical illness claim, the life insurance element may end. Always check the policy summary and terms before applying.

Joint mortgage life insurance or single policies?

If you have a mortgage with a partner, you may be considering joint life insurance.

A joint life insurance policy covers two people under one policy. It is often set up to pay out once, usually on the first death, after which the policy ends. This can be cheaper than taking out two separate policies, but it may not provide the same level of protection.

Two single policies can cost more, but they could provide two separate pay-outs if both people die during their individual policy terms. This may be useful if you have children, wider financial commitments or want each person to have their own cover.

There is no single right answer. It depends on your mortgage, dependants, income, budget and what you want the cover to achieve.

You can read more in our guide: Should I get joint life insurance for a mortgage?

What if you are moving house?

Moving house can be a good time to review your life insurance.

If your mortgage is increasing, your existing cover may no longer be enough. If your mortgage term is changing, your policy term may also need reviewing. If you are moving in with a partner or taking on a joint mortgage, you may also want to consider whether joint cover or single policies are more suitable.

You may not always need a new policy, but it is worth checking whether your existing life insurance still matches your mortgage, dependants and wider financial commitments.

Our guide to whether you need life insurance when moving house covers this in more detail.

What happens when the mortgage is paid off?

Paying off your mortgage does not automatically cancel your life insurance policy.

If you have a term life insurance policy, it can usually continue until the end of the policy term, unless you cancel it or stop paying premiums. If a valid claim is made during the term, the policy can still pay out.

This may be helpful if your family would still need financial support after the mortgage has been cleared. For example, they may still have household bills, living costs, funeral expenses or other debts to manage.

However, if your policy was only taken out to cover the mortgage, you may want to review whether the cover still suits your needs once the mortgage balance changes or is repaid.

Could life insurance affect inheritance tax?

Life insurance pay-outs are usually paid free from income tax. However, the pay-out may form part of your estate for inheritance tax purposes unless the policy is written in trust.

Writing a policy in trust can help keep the pay-out outside your estate, but it is a legal arrangement and may not be suitable for everyone.

If inheritance tax or estate planning is a concern, it may be worth getting financial or legal advice. You can also read more about Cavendish Online’s guidance on how to write your policy in trust.

What should you think about before applying?

Before choosing between life insurance and mortgage life insurance, it is worth asking a few practical questions:

• Do you want to cover only the mortgage, or wider family costs too?

• Do you have a repayment mortgage or an interest-only mortgage?

• How much is left on your mortgage?

• How long is left on the mortgage term?

• Would your family need help with household bills as well as the mortgage?

• Do you have children or other dependants?

• Would joint cover or single policies be more suitable?

• Do you want critical illness cover included?

• How much can you afford in monthly premiums?

• Would the policy still be affordable if your income changed?

The answers can help you decide whether decreasing term life insurance, level term life insurance, whole of life insurance or another protection product may be more appropriate.

Life insurance vs mortgage life insurance: which one should you choose?

It depends on what you need the policy to do.

Mortgage life insurance may be worth considering if your main priority is helping your loved ones clear the mortgage if you die during the policy term. This is often arranged as decreasing term life insurance for a repayment mortgage.

Level term life insurance may be more suitable if you want the pay-out to stay the same throughout the term, or if you want your family to have money left over after the mortgage is paid.

Whole of life insurance may be more suitable if you want cover that lasts for life, rather than cover linked to a mortgage term.

The key is not just choosing the cheapest premium, but finding a policy that matches your mortgage, your family’s financial needs and your long-term budget.

If your main focus is protecting your mortgage, you can compare options through Cavendish Online’s mortgage life insurance page.

The key takeaway

Life insurance and mortgage life insurance can both help protect your loved ones financially, but they are not quite the same.

Mortgage life insurance is usually focused on helping clear the mortgage if you die during the policy term. Standard life insurance can provide a wider cash lump sum that your beneficiaries can use for the mortgage, household bills, debts, childcare or other costs.

Before applying, compare the type of cover, the policy term, the pay-out amount, the premium, any exclusions and whether optional extras such as critical illness cover are needed.

Cavendish Online is authorised and regulated by the Financial Conduct Authority. This article is for information only and does not constitute personal advice.