In this article, we'll tell you everything you need to know about mortgage life insurance. We'll explain which types of life insurance policies are best for mortgage holders, the benefits of life cover when you have a mortgage, and share some tips on selecting the right life insurance for you. Let's get started.
The short answer is 'no'. There is no legal requirement to take out life insurance when you get a mortgage.
However, there's much more to it than that. If you have a mortgage, life insurance can deliver a wide range of benefits. If the worst happened and you passed away unexpectedly, your life insurance policy could be the difference between your loved ones losing their home or being able to stay.
Life insurance is a very simple concept. You take out a life insurance policy, usually for a certain number of years. Every month, you pay life insurance premiums to your provider.
If you pass away (or are diagnosed with a terminal illness) during the term of your life insurance policy, your insurer will pay a lump sum to your nominated beneficiaries, which they can use how they wish.
However, many people choose to get life insurance to help cover their repayment mortgage if they unexpectedly pass away. This is because even if you pass away, your mortgage debt still exists. Someone still has to fulfil those mortgage payments.
For most people, their home is their most treasured possession, but their mortgage is their biggest debt. Life insurance is an investment to ensure that if the worst happens, your loved ones have a financial safety net for their home.
There are several different types of life insurance policies available. Here are the five best life insurance options for mortgage holders:
Each type of life insurance policy has advantages and disadvantages for mortgage holders. You can find out about these types of life insurance in more detail in this article from MyTribe.
Decreasing life insurance is one of the most popular types of policy for mortgage holders because it’s tailor-made to cover specific debts. If your only goal from your life insurance is to cover your mortgage repayments if you pass away (and you’re not interested in the other benefits life insurance can bring), decreasing life insurance is a great option for you.
As a mortgage life insurance policy, decreasing term gives you everything you need. It works on the principle that as you move through your term and keep up your mortgage repayments, the amount you owe reduces. Therefore, as you move through your life insurance term, you don’t need as much life cover to settle the remaining balance if you pass away. As a result, your potential payout decreases the nearer you get to the end of your term.
Monthly life insurance premiums for decreasing term policies are generally less expensive than level term, joint life insurance or other types of policy. If you’re only looking to cover your mortgage repayments, decreasing term offers a more cost effective option to do it.
As we’ve seen above, mortgage life insurance can deliver a wide range of benefits to property owners. However, there are some situations where having life insurance is even more strongly recommended:
Life insurance isn’t just for mortgage holders. It can deliver several benefits over and above covering your repayment mortgage if you pass away.
Many people take out life insurance policies to provide financial security for their loved ones beyond simply paying mortgages, loans or other debts. Depending on the amount of life cover you take out, your dependants can use their payout to maintain their lifestyle, to provide a nest egg for children or to supplement their retirement income.
Others decide to take out life insurance to pay for their funeral. With a life insurance payout, your loved ones can give you the send-off you always wanted without worrying about the financial burden.
Finally, some people use life insurance as a way of minimising their inheritance tax liability. If you get your life insurance policy ‘written in trust’, it’s not considered part of your estate if you pass away, and therefore, not part of your inheritance tax allowance. If you’re considering this, make sure you talk to a solicitor or financial advisor first.
With all the different life insurance options out there, finding and purchasing the right policy can be a challenge, especially if you’re trying to arrange it at the same time as your mortgage agreement. Here are some tips to select the right life insurance policy for you:
Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.
Mike is a personal finance copywriter who has written for numerous financial services publications and websites over many years.
There is no legal requirement for you to purchase life insurance when you get a mortgage. Many lenders will strongly recommend that you buy a life insurance plan, but you’re free to say no. However, there is a wide range of benefits to getting life insurance alongside your mortgage, so you should take time to consider it.
The cost of your life insurance cover will depend on many factors, including:
Talk to a life insurance broker who will assess your personal circumstances and recommend the best life insurance to get.
No, it’s likely you’ll need many other types of insurance when you buy a home, including:
If you have more than one property, you should take out landlord insurance, which insures you against damage to your rental property.
Mortgage life insurance is an excellent option if you’re worried about what would happen if you passed away unexpectedly.
However, if you’re more concerned with losing your job than passing away, income protection insurance could be a more appropriate choice. Income protection is insurance that (provided you keep up with your premiums) steps in to replace your monthly wage if you lose your job due to redundancy.
If you’re more concerned with what would happen if you couldn’t work due to a serious illness, critical illness cover could be the option for you. With critical illness cover, if you contract a severe illness such as cancer or heart disease, your insurance will pay a lump sum, which you can use to maintain your mortgage payments until you’re better.
There are several benefits to having life insurance after you're mortgage-free. It’s a good way to provide financial support for your family after you’ve gone. You can also use life insurance to be more tax-efficient.
There’s no law against holding more than one life insurance policy, so if you need life insurance for another purpose over and above covering your mortgage, you could take out another plan.
