Mortgage life Insurance is used to pay off your Mortgage if you die. So your loved ones can keep their home and won’t be left with mortgage repayments they can’t afford..
In this guide we walk you through how mortgage life insurance works, including the different levels of cover, how long a Policy lasts and how to apply.
What is mortgage life insurance?
Mortgage life insurance is a type of life cover that is designed to protect a home mortgage. It is also known as mortgage protection insurance or mortgage protection.
You pay a fixed monthly premium and the policy will last for a set number of years.
The life cover can be level (so it doesn’t change) or decreasing, which we look at further down.
Should you die, then the policy will pay out a lump sum, that could allow your family to repay the mortgage.
You would normally take out this cover when you apply for a mortgage, with the sum assured and policy term matching the mortgage.
Mortgage life insurance is different to Mortgage Payment Protection Insurance (MPPI). This covers your mortgage repayments if something stops you from working, such as sickness or injury.
What does mortgage life insurance cover?
The policy covers you against death during the policy term.
Should you die before the policy ends then the insurance company will make a lump sum payment to your family. This could enable them to fully repay the mortgage. At this point the policy will end.
It is possible that you never need to claim, and the policy will then end when the term runs out. There’s no cash value.
Many policies now include terminal illness benefit as a standard feature. Broadly, this means that the policy will payout if you are diagnosed with a terminal illness, with a life expectancy of less than 12 months.
How does mortgage life insurance work?
Mortgage life insurance is used to protect a mortgage in the event that one of the borrowers dies before it is repaid.
There are two types of policy to choose from:
Decreasing mortgage life insurance
This policy is best used to protect a capital and interest, or repayment, mortgage.
The reason is that the death benefit reduces each year, as the mortgage balance goes down.
This makes it a very affordable policy.
Level mortgage life insurance
This policy can be used to cover a repayment mortgage or an interest only mortgage.
The death benefit stays the same throughout the policy term. So if you claim and have a repayment mortgage there will be some excess cash.
It will cost slightly mortgage than the decreasing policy.
Who gets the money?
This depends if the policy covers just one person or is a joint policy covering two people.
Single life: The cash sum is paid to the policyholders estate.
Joint life: The payment is made to the surviving policyholder.
Will the policy have a cash in value?
No. Term insurance policies do not accrue any value. You may cancel the policy at any point, but you will not receive any money back.
Do you need to repay the mortgage?
Surprisingly, no.
Although the policy will be set up with this as the main intention, there’s no restriction on how the money is spent. It could be used to fully, or partly, repay the mortgage, or used to fund the monthly payments. Or something else entirely.
How long does the policy last?
When you apply for life insurance you need to specify the number of years you want the cover for, much like a mortgage.
The length of time will affect the premium. So a 20 year policy will cost more than a 15 year policy, for the same level of cover.
When you first apply for a mortgage this is quite easy. If you have a 25 year mortgage, most people will want their life assurance to last for 25 years, to cover the whole mortgage term.
Problems can occur later on where you remortgage or move house, as many people will slightly adjust their mortgage term at this point.
Your life cover can then become out of sync. With a policy that has 18 years left to run protecting a 20 year mortgage.
You really don’t want this to happen.
What happens to your mortgage if you die without life insurance?
If you pass away without life insurance, the mortgage still needs to be dealt with. The full debt will remain in place, with responsibility for the mortgage falling to any joint borrowers or your family.
What is the difference between life insurance and mortgage life insurance?
Not much actually. As mortgage life cover is designed to protect a repayment mortgage, the sum assured, or death benefit, decreases each year. Whereas a standard life insurance policy will have the same level of cover throughout.
Insurer’s who offer a mortgage related policy may choose to simplify the application process and the subsequent underwriting. This could mean asking fewer questions or having a higher cover threshold before further evidence is needed.
Life insurance
- Fixed monthly premium
- Fixed policy term
- Level sum assured
- No cash value
- Used for family or mortgage protection
Mortgage life insurance
- Fixed monthly premium
- Fixed policy term
- Decreasing sum assured
- No cash value
- Used for mortgage protection
How much does mortgage life insurance cost?
The cost of mortgage life insurance varies from person to person and is affected by:
- Your age
- Your health
- Medical history
- Amount of cover needed
A feature of term assurance policies is that the monthly premium is fixed. So you pay the same amount each month for both level cover or decreasing cover.
Generally, the younger and healthier you are when you apply for life insurance, the cheaper it will be.
Example premiums
| £250,000 | £300,000 | £400,000 | £500,000 | |
|---|---|---|---|---|
| Age 25 | £8.50pm | £9.60pm | £11.80pm | £14.00pm |
| Age 35 | £12.20pm | £13.99pm | £17.57pm | £21.16pm |
| Age 45 | £24.78pm | £28.97pm | £37.33pm | £45.70pm |
These premiums are for illustration purposes only. Cover shown is a decreasing term insurance, over 25 years. Male, non-smoker. Correct as at September 2023.
Do you need life insurance to get a mortgage?
Legally, you don’t have to take out life insurance when getting a mortgage, although it is definitely worth considering.
UK lenders are not allowed to make having life cover compulsory.
So the choice of whether to have it, or not, is completely up to you.
You can read more about how this works here.
Do you need a mortgage to get mortgage life insurance?
Yes you do. This is because mortgage life insurance is a policy designed to cover a mortgage, and the insurers assess your application on this basis.
If you just require life cover for your family, then you need to apply for family life insurance. This can be in the form of a level policy, decreasing or whole of life.
Can you add critical illness cover?
Critical illness is a type of cover that pays out a lump sum if you suffer from one of the severe illnesses listed on the policy. These can include heart attack, cancer or stroke.
Importantly, the lump sum is paid to you, while you are still alive.
Adding critical illness means that you could use the lump sum paid out if you have one of the illnesses, to pay off your mortgage. You need to bear in mind that the premiums for critical illness mortgage cover will be much higher than basic life cover.
Most mortgage policies that include both life cover and critical illness cover will be set up as a one event policy. This means that the policy will only ever pay out once.
- If you claim for a critical illness then the policy will stop
- If there is a death claim then the policy will stop
This can be important where you have a joint policy, as the person who has not claimed will lose all of their cover. Having a policy each means that this cannot happen.
What happens to life insurance when your mortgage finishes?
Your mortgage and your life policy are separate arrangements, and for many people they will finish at slightly different times.
This is because when you move home or remortgage, the mortgage term is often altered.
What you want to avoid is your life cover finishing before your mortgage, as this will leave you unprotected.
If your mortgage has been fully repaid but you still have time left on your life policy, you have two choices:
- Cancel the policy as the cover is no longer needed.
- Keep the policy, which will still payout if you die, to provide some additional security for your family.
If you feel that the monthly premiums are too expensive, or perhaps unaffordable, then you could ask the insurance company to reduce the level of cover which will then lower the premiums.
This will allow you to continue with some life cover but at a reduced cost.
How to apply
As with a mortgage, it’s best to shop around before you apply for a new policy.
Talk to an independent financial adviser, or broker, who will have access to many different policies and insurers.
Some policies can take a while to set up. It depends how much cover you ask for and your medical history. So don’t leave it to the last minute!
Do you need life insurance to get a mortgage?
When you’re looking to buy a home or remortgage, one of the most important decisions you need to make is whether or not to take out life insurance.
But do you need life insurance to get a mortgage?
In this article, we will explore what life insurance is and how it works when applied towards mortgages.
Also in this section
Insurance
Life Insurance
Property Insurance
Critical Illness
Mortgage Life Insurance
Family Life Insurance
This post first appeared on Respect Mortgages - Be In The Know, please read the originial post: here
