Lots of people use life insurance as a way to protect their mortgage, but what happens when it's paid off? Does your policy simply end, or does it continue?
In this article, we'll explain what happens to your policy and the options you have once your mortgage is fully paid off.
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What is mortgage life insurance?
Mortgage life insurance is usually taken out to protect your partner or other loved ones from taking on that financial burden if you pass away before the mortgage has been paid off. It could be the difference between your loved ones keeping their home or being forced to sell it to settle debts.
Three main types of life insurance are often used to cover a mortgage:
Decreasing term life insurance has a payout value that reduces over time in line with your mortgage balance. As it's a term policy, your insurer will only issue a payout if you die within the agreed term. It's also known as mortgage protection insurance.
Level term insurance is another form of term cover where the payout stays the same throughout the policy. It's not tied to your mortgage, so it can be used to cover other costs where needed.
Whole life insurance is a type of permanent cover, meaning the policy will not expire and will payout regardless of when you die. Like level term cover, the payout is fixed and is not directly tied to your mortgage, so it could also cover additional expenses. It's also known by insurers as life assurance.
Does your life insurance end once the mortgage is paid?
Your cover doesn't automatically end as soon as your mortgage is repaid, as they are separate products. As long as you keep paying your premiums, your cover will continue until the end of the term. The amount you receive will depend on the type of policy you own.
With decreasing term life insurance, the sum assured will keep decreasing over time, even if you have cleared your mortgage. This means that if you were to pass away, your loved ones would likely receive some kind of payout if it’s still within the original term.
With a level term or whole of life policy, the cover remains in place even after the mortgage is paid off. Because the policy pays out a fixed amount, your loved ones could still receive a significant lump sum that can be used for:
Everyday living costs
Funeral expenses
Future financial support for dependants
Leaving a cash gift or inheritance
Should I keep my life insurance after my mortgage is paid?
Your home is not the only thing that needs protecting. Although your main reason for purchasing life insurance could be to cover mortgage payments, there are other costs your family may need support with in your absence
You could still need protection if:
You have children or other dependants
Your partner relies on your income
You have other loans or debts to repay
You want to help with funeral costs
You’d like to leave money behind as a gift
If none of these apply and you feel your financial responsibilities have reduced, you may decide the policy isn’t necessary any more. Whilst it's still worth having cover for any other expenses or unforeseen circumstances that may arise, you are also free to cancel the plan at any time for no additional cost.
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Reviewing your policy
It's something people tend to put off, but you should review your life insurance regularly, especially after a big life event. Paying off your mortgage is no exception to this, as it will likely affect how much cover you currently need.
You may decide that your cover is too high, in which case you could opt to reduce the amount. Or if you have dependants who still rely on you financially, you may want to keep the same level of protection so they’re supported if the worst happens.
When reviewing your policy, it can help to think about:
Who currently depends on your income?
Do you have any other loans or financial commitments?
How much would your loved ones and/or dependents need to maintain their lifestyle?
Are you planning for future needs such as retirement?
It’s also worth checking how long is left on your policy. If you only have a few years remaining, you might choose to keep it running until the end rather than starting a brand-new policy, which could cost more due to age or health changes.
Changing or cancelling your life insurance
Even if your mortgage has been paid off, it’s still worth considering some form of life insurance to keep your loved ones financially protected.
Once your mortgage is cleared, you have several options.
You could cancel your life insurance policy completely, which stops premium payments but also means the cover ends, and no payout will be made.
Alternatively, you might switch to a different type of cover, such as moving from decreasing term to level term, whole of life, or a joint policy.
Another option is to adjust your cover amount, reducing the payout to reflect your current needs and avoid overpaying.
Before you make a decision...
There are a lot of reasons why we have life insurance, none more important than protecting the people we love. Though your circumstances change, there's still a need to keep your loved ones protected financially.
Our advisers can provide expert information to help you make an informed decision. It may be the case of switching policies or reducing the amount of cover.
They can also talk you through additional protection products that may suit your situation, such as income protection and critical illness cover.
Call our team on
01392 436193 (Monday - Friday 9am - 5.30pm)
for dedicated support.
