Keen to buy a home? Wondering if you need life insurance to get a mortgage?
You’re in the right place. Here, we’ll look at everything to do with mortgages and life insurance.
Do I need life insurance for a mortgage in the UK?
Lots of people think they legally have to get life insurance to get a mortgage. But this simply isn’t true! Contrary to what you might think, you don’t actually need life insurance for a mortgage in the UK.
That said, life insurance is a very good idea, especially when you’re making a big financial commitment like buying a home. We’ll look at why it’s so useful when you have a mortgage in a second. But first, you might be wondering what life insurance even is!
Life insurance is a special kind of insurance that protects your loved ones financially if you die. It’s a bit of a morbid topic, but an important one!
Basically, you pay a set amount of money every month or year (known as your premium). In return, your insurance provider (the organisation that gives you your insurance) agrees to pay your loved ones cash (usually one big lump sum) if you die while you’re covered.
It’s there to make things that little bit easier for your loved ones in what’s sure to be a really distressing time for them. Normally, they’ll use it to cover things that they might otherwise struggle to pay without your income, like household bills, childcare costs or mortgage payments. Which brings us onto…
Why is life insurance useful if you have a mortgage?
So, what has life insurance actually got to do with mortgages? Well, if you’re sharing your home with other people, like a partner or your family, they might struggle to pay the mortgage by themselves if you died.
In fact, even if your loved ones felt they could scrape the money together, your mortgage lender may not be happy to transfer the mortgage into their name alone. Normally, lenders will only let you borrow around 4.5 x your yearly income, so if your family’s salary isn’t high enough, your lender might refuse to let them have the mortgage by themselves.
Life insurance means that your loved ones will get a payout when you die, which they can use to pay off the mortgage. That way, they can carry on living at home if you pass away, rather than having to sell the property and move out.
In short, life insurance gives you peace of mind that your loved ones can stay at home if you sadly pass away. Simple!
What type of life insurance should you get with a mortgage?
Some life insurance policies are only designed to contribute towards funeral costs, while others are designed especially for paying off the mortgage (your policy is your insurance agreement, which is essentially a contract). Others still can be used for just about anything your loved ones want.
So, what type of life insurance is best if you want to help your loved ones pay off the mortgage when you’re gone? Here are the main types.
1. Term life insurance
Term life insurance is a life insurance policy that lasts for a set period of time. You can choose how long you want the policy to last for, which is known as your insurance term. For example, you might want to be covered for 5, 10, 25 or even 50 years.
Your loved ones will only get a payout if you die during that time. Just bear in mind that you can’t normally stay covered on a term policy after a certain age (often around 80).
Sounds simple enough, right? However, there are a few different types of term policies.
- Level term life insurance. Level term life insurance is the most popular type of life insurance in the UK. It gives your loved ones a set lump payment if you die, which will stay the same throughout your policy term. In other words, if you died tomorrow, your loved ones would get paid the same amount as they would if you died in a number of years.
- Decreasing term life insurance. This is also known as ‘mortgage life insurance’ because it’s typically designed to pay off the mortgage. With this kind of insurance, the payout your loved ones get will become smaller each year. So, if you died tomorrow, they’d get paid more than they would if you died in a number of years. This is because, if you have a repayment mortgage like most people, the outstanding balance on your mortgage will get smaller as you pay it off over the years.
- Increasing term life insurance. With increasing term life insurance, the lump payout your loved ones receive if you die will get bigger each year to keep up with inflation (inflation refers to the way that products and services get more expensive in an economy over time). That means if you died tomorrow, your loved ones would get slightly less than they would if you died in a few years. But the value would probably be roughly the same, as the cost of living will usually go up.
- Family income benefit (FIB). With family income benefit, instead of receiving one big payment when you die, your loved ones will receive a payout every month until the end of your policy’s term. In this way, it’s designed to replace your income when you pass away.
Any of these types will work if you want to help your family with the mortgage when you’re gone. So, which one should you get?
Well, if all you want to help them with is the mortgage, then decreasing term life insurance may be all you need – as long as you’re on a repayment mortgage like most people (one where your monthly repayments are designed to pay off the loan itself as well as the interest).
Normally, these policies are designed so that the payout hits zero at roughly the same time that your mortgage gets paid off completely (although the payout amounts are agreed in advance so even if you pay off the mortgage early, your loved ones will still receive the payout that’s outlined in your policy). Plus, decreasing term life insurance is normally cheaper than other types.
However, don’t forget that your mortgage isn’t the only cost your loved ones might struggle with if you die. The payout might also be handy for them to cover other costs like household bills or childcare. Plus, even if they don’t specifically need the money for anything, an insurance payout can be a great way to provide your loved ones with some security and support when you’re gone – even if you just view it as a gift.
The payouts from other term life insurance policies, like level term or increasing term, won’t decrease with time. So, your loved ones have more chance of ending up with some leftover cash even after the mortgage has been paid off. As far as we’re concerned, that can only be a good thing – but remember, these types of insurance will normally be more expensive!
Whole-of-life insurance, also known as life assurance, is a policy that gives your loved ones a lump payment whenever you die. Remember how we said that term policies only last a set amount of time and they usually won’t cover you past the age of 80? Well, with whole-of-life insurance, you’ll know your loved ones will inevitably get a payout, as your policy won’t run out until your death.
These policies tend to be much more expensive than term policies and they’re also less common. Mostly, they’re used by people who want to contribute towards the cost of their funeral or who want to cover the cost of the inheritance tax bill for their loved ones (that’s a tax that’s charged on the money and belongings of someone who dies).
Anyway, are whole-of-life insurance policies useful for helping your loved ones with the mortgage? Absolutely!
Whole-of-life insurance can offer the most protection out of all the policies as it will guarantee your beneficiaries will eventually get a payout – hence the hefty price tag! Depending on how big you want the payout to be, your loved ones can use it to pay off the mortgage if it’s still outstanding when you die. Or, they can use it for any other purpose they choose.
Over-50s life insurance
An over-50s life insurance policy is one that’s guaranteed to accept you if you’re over the age of 50 (although you’ll still need to be under a certain age – normally 80 or 85). Once you have one of these policies, you’ll be covered until you die, as long as you keep up with the payments.
Wondering why you’d need over-50s life insurance instead of just getting a standard life insurance policy? It’s because most insurance providers will decide whether to give you life insurance (and how much to charge you) based on a number of factors including your age and health.
As you get older or you develop health complications, it becomes harder to get life insurance – and more expensive! An over-50s life insurance policy won’t ask you any questions about your health so you’ll know you can get accepted regardless.
That all sounds very good until you realise that these policies tend to be much more expensive than other kinds of life insurance. Not only that, but you’re often not allowed to make a claim in the first 1 or 2 years (making a claim is when you ask your insurance provider to pay out)!
This means that even though you’re covered until you die, you could end up paying in more than what your loved ones get out.
Although your loved ones could theoretically use the payout to pay off the mortgage, the amount of cover you can get will normally be quite low – typically between £1,000 and £25,000. For that reason, these policies are often just used to contribute towards funeral costs. After all, if you have a big mortgage, the payout isn’t likely to stretch very far!
Do I have to get the life insurance my mortgage broker recommends?
A mortgage broker – also known as a mortgage advisor – is a professional who helps you get a mortgage. They’ll normally save you a ton of time and money as they’ll advise you on the best mortgage lenders and deals for you, and they’ll even sort out your mortgage application. But anyway, we digress!
Some mortgage brokers will also recommend you a life insurance provider, as they’ll know that lots of people who get mortgages will also be looking for life insurance. It can be tempting to just go with the insurance provider they recommend. After all, buying a home is a stressful process and going off a recommendation can make life easier. BUT don’t fall into the trap of blindly opting for the provider recommended by your mortgage broker!
Firstly, you have no obligation to use the provider they recommend. And secondly, you’ll normally be able to save money by comparing insurance deals and providers yourself – your mortgage broker will normally get paid for referring you, so their recommendation will probably be what’s best for their pockets and not necessarily what’s best (or cheapest!) for you.
In a similar vein, if your mortgage lender tells you that you have to get life insurance, this is a red flag and if we were you, we’d find another broker (you can use our free find a mortgage advisor service to find the right one for you).
Ultimately, we’d recommend finding your own life insurance using a comparison site like MoneySuperMarket, Confused.com, Compare the Market or GoCompare. These sites make it really easy to compare different levels of cover and how much they cost. In an ideal world, we’d advise using all 4 (or at least a couple!) as they won’t all show the same deals.
Even if you do eventually decide to use your mortgage lender’s recommended provider, it’s worth at least checking what else is out there first as it could save you hundreds of pounds per year.
If your situation is a bit more complex and you want some help, you could also look at using an insurance broker. These are professionals who can help advise you on the best insurance type and deal for you. Just make sure to use one who can compare lots of different insurance providers, rather than just a few – you can find one using the British Insurance Brokers’ Association.
Ready to get life insurance?
Although life insurance isn’t a legal requirement, we’d strongly recommend it. Life insurance will allow you to make sure that your partner or family can carry on living at home if you sadly pass away before you’ve paid off your mortgage. Even if you don’t have a mortgage to pay, it will give you that peace of mind that your loved ones will be able to get by financially without you around.
Does protecting your loved ones financially sound appealing to you? Then check out our life insurance guide where we break down everything you need to know about it. Or, are you ready to jump straight in? In which case, head over to a comparison site like MoneySuperMarket, Confused.com, Compare the Market or GoCompare to start comparing deals. You’ll have that all-important peace of mind before you know it!