Do I Need Life Insurance For A Mortgage?
Do I need life insurance for a mortgage? Having life insurance to get a mortgage is not compulsory. You are probably not legally obliged to get life insurance for a mortgage, but some lenders may consider it a precondition for letting you borrow money to buy a home. For the vast majority of homeowners, having financial protection in place makes sense. If you own a property, a mortgage is likely to be the biggest debt you leave behind should the worst happen, so having a policy in place can help give you peace of mind.
Average UK house prices were £245,443 as of October 2020* – with prices this high, a lot of homeowners will have a mortgage to pay, so it’s understandable that people want to spend any spare income wisely. However, if you have children, a partner, or other dependents living with you who rely on you financially, taking out mortgage life insurance could be considered important expenditure.
Do I Need Life Insurance For A Mortgage?
Not compulsory. For nearly everyone, buying a home is the single biggest financial commitment you will make. At the start of your mortgage, you will owe your mortgage lender for anything up to 100% of the purchase price for your home – most likely amounting to tens or hundreds of thousands of pounds.
With capital and interest mortgages, each month you pay off a little of your mortgage until, at the end of your mortgage term, you have repaid the lender and now own the property outright. However, what happens if you die before you pay off your mortgage? If you have a joint mortgage and die without life insurance in place to cover your mortgage then, the bank will look to your surviving mortgage partner to repay the remainder of the debt. This might be a problem say, if your surviving partner couldn’t afford the repayment on their own – forcing them to sell the house to pay off the debt.
Mortgage life insurance prevents this by paying off whatever remains of your mortgage debt if you die before the mortgage ends. With this in place, your loved ones are protected, and you can feel safe in the knowledge that your family will have one less thing to worry about.
Some life insurance policies will also pay off your mortgage debts while you are still alive if you are diagnosed with a terminal illness.
Read More: What is mortgage protection insurance?
The difference between life insurance and mortgage life insurance
Both life insurance and mortgage life insurance are designed to pay out a cash sum if you die within the length of your policy. Both types of insurance can be used to help your loved ones pay off the mortgage.
The main difference between life insurance and mortgage life insurance is that they are designed with different protection purposes in mind. Some people want a policy that will help protect their family financially if they were to die during the policy term. Others may have a need for a policy that could help their family pay towards the mortgage, should the worst happen.
Everyone’s circumstances are different, so you should take the time to consider the different options available. We’ve outlined the policies we offer below, along with what they are designed to help you protect.
Life insurance could pay out a cash sum on your death during the length of the policy. It could be used to help protect your family’s lifestyle and everyday living expenses or to help pay towards an interest only mortgage. The premiums and the amount of cover you choose remain the same, unless you alter your policy.
Decreasing Life insurance is designed to help protect a repayment mortgage, so the amount of cover reduces roughly in line with the way a repayment mortgage decreases.
Just remember that life insurance is not a savings or investment product and has no cash value unless a valid claim is made.
SEE ALSO: Mortgage vs Life Insurance – Is Mortgage Life Insurance Worth It?
Buying a home with a partner
Life insurance is certainly important to consider when buying a house as a couple. If you’re buying your home with your partner, your mortgage repayments could be calculated on the basis of two salaries. If you or your partner died while your mortgage loan was still outstanding, would one of you alone be able to keep up the regular mortgage repayments?
Life insurance can help protect the family home by paying out a cash sum if you die during the length of your policy, which can be put towards the remaining mortgage balance – this is what ‘mortgage life insurance’ usually refers to. Your loved ones can use the payout to help clear the outstanding mortgage debt, meaning they can continue living in your family home without worrying about the mortgage.
Life insurance as a landlord
If you’re buying a home as an investor, or you already own a home and you’re looking to rent it out, you may still need life insurance. This way, you can help cover the remaining balance in the unfortunate event you pass away. You might want to increase your life insurance cover to account for the higher mortgage liability should you refinance your investment property or portfolio. Please note that life insurance is not the same as landlord insurance, which refers to enhanced coverage for the structure of your home (buildings insurance) and your possessions (contents insurance).
Do I need life insurance if I don’t have a mortgage?
It is a common misconception that life insurance is only relevant to homeowners. While it’s true that renters are less likely to take out life insurance, that doesn’t mean you don’t need life insurance if you don’t have a mortgage. If you’re a tenant, think about the financial impact of the loss of your salary if you were no longer around. If you live with your family, could your loved ones afford the rent in your absence? What about other costs like household bills or child care costs if you have a family. In essence, life insurance is always worth considering if other people rely on you financially, it’s not just for those with a mortgage.
Why Mortgage Lenders Insist on Life Insurance?
Having life insurance to get a mortgage is not compulsory. However, taking out a mortgage is a major financial commitment. Honoring this commitment is vital if you do not want to risk losing your home. It is therefore essential to have a ‘back-up plan’ to ensure your mortgage is repaid in the event of something unforeseen happening.
As far as lenders are concerned, life insurance with (usually optional) critical illness cover is the ideal back-up solution, as it ensures the mortgage is repaid in the event of a household’s main income provider becoming critically ill or passing away.