Taking out a mortgage involves lots of options and choices. One question that frequently arises among homeowners and potential buyers is, “Can you add life insurance to your mortgage?”
In this article, we’ll explore this topic in detail, examining whether it’s possible to add life insurance to a mortgage, the pros and cons, and alternative options you might consider.
The need for life cover
A mortgage is a long-term loan specifically designed to purchase property, usually requiring repayments over 25 to 30 years.
On the other hand, life insurance is a policy that pays out a lump sum to your beneficiaries upon your death, providing financial security for various expenses, including mortgage debts.
The idea of adding life insurance to a mortgage often stems from the desire to ensure that your loved ones aren’t burdened with ongoing mortgage payments should something happen to you.
Is it possible?
The straightforward answer to the question “Can you add life insurance to your mortgage?” is yes.
But we should point out that the life insurance aspect will not form part of your mortgage account, this will always be separate.
In the UK, life insurance is not included as a standard feature in mortgage agreements. However, many mortgage providers offer it as an optional add-on policy.
Some lenders have partnerships with insurance companies, offering bundled packages that include life insurance. These packages can be convenient but may come at an additional cost. You need to read the terms and conditions to understand what you’re signing up for fully.
Equally, you could take the matter into your own hands and source a life policy elsewhere.
The different policies
There are a few different policies available. Here’s just a quick overview:
Decreasing term insurance
This policy is normally paired up with a repayment mortgage, as the life cover goes down each year.
Fixed term, fixed premium and no cash value.
Level term insurance
A level term policy can be used to protect any mortgage type but is most often used for interest only mortgages, as the balance does not go down.
Fixed term, fixed premium and no cash value.
Family income benefit
We would not normally suggest this for mortgage cover as it only pays out a monthly ‘income’. But a very affordable policy that can provide some top-up cover perhaps.
Fixed term, fixed premium and no cash value.
Whole of life
This policy tends not to be used for protecting a mortgage but it is up for the job. As the name suggests, it provides cover for your whole life, not just a set number of years.
More expensive that a term policy, and some may produce a small cash value in the future.
How to add life cover to a new mortgage
If you’re in the process of taking out a new mortgage, adding life insurance should be relatively straightforward.
While it’s a good idea to get some ball-park quotes in the early research stages, you can only apply for a new life policy once you have decided on the mortgage you need.
You can then set about getting the best deal based on the correct sum assured and policy term.
There’s lots of ways that you can buy life assurance. We would suggest approaching a financial adviser. By doing this you will get a competitively priced policy, but the adviser will also make sure it is set up correctly.
If you are moving home, this policy should start when you exchange contracts, but for a remortgage it can start as soon as it’s ready.
There’s no need to ask your lender for permission, or to notify them.
Adding cover to an existing mortgage
Arranging mortgage life insurance to cover a mortgage you already have is a very similar process.
The main difference is that the debt is already in place, so time is of the essence.
First, you need to ask your lender exactly how much is left on your mortgage balance and how many years are remaining.
Using these two figures you can then start looking for a new policy. Again, we would suggest asking a financial adviser to research your options, making sure the cover is tailored to your unique situation.
Once ready, this policy can start straight away. There’s no need to ask your lender for permission, or to notify them.
How much cover do you need?
The amount, and type, of cover needed will differ between borrowers.
It’s good to make sure that the amount of money borrowed is fully covered by either a level, or decreasing life policy. This way should something happen to you the mortgage is fully repaid.
Don’t forget to factor in any arrangement fees or higher lending charges, that were added to the mortgage.
Critical illness cover is more expensive, but it will pay out while you are still alive. It is designed to payout upon diagnosis on a set range of illnesses that will include; cancer, heart attack, stroke etc.
Don’t worry if you can’t afford to cover the whole mortgage amount. Just reduce the sum assured until the premiums better suit your budget, something is better than nothing.
A financial adviser will be able to recommend the amount of cover you need and what type of protection is most suitable.
Taking the next step
Visit www.unbiased.co.uk for more information about life insurance and how it works.
You will also be able to search for a financial adviser.
