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?
There are plenty of reasons why taking out a policy could be beneficial to you and your family. In this article, we will explore what life insurance is and how it works when applied towards mortgages.
Is it compulsory to have mortgage insurance?
“Do I need life insurance to get a mortgage?” is a commonly asked question by borrowers.
The good news is that it’s not compulsory for you to take out a life insurance policy when getting a mortgage. It might be a very sensible thing to do, but it’s not a legal requirement.
What is mortgage life insurance?
Mortgage life insurance is a policy that pays out a lump sum of money if you die during the policy term.
This money will enable your family and dependants to pay off the mortgage. The consequences of not being able to pay off your mortgage could end in your family being forced to sell their home and move out.
The life assurance plan is separate to your mortgage payments, has a set term and generally has fixed monthly payments.
You will find more useful information in our article: “Does life insurance have to pay off debt?“
How does life insurance work?
There are a few different types of policies which we explain below.
The basic idea of life insurance is it pays out when you die. Plans can pay out a lump sum (to repay a mortgage) or a regular monthly payment (to replace a lost income).
What happens to a mortgage when someone dies?
A mortgage is a debt that needs repaying, even after death.
When someone dies their mortgage remains in place and any surviving relatives or partners must keep up the repayments. If this is unaffordable, and there is no lump sum available to fully repay the debt, the lender has the right to sell the property to get their money back (repossession).
The cost of life cover is affected by 5 things
1 The amount of cover needed
This is the sum assured and it’s the amount the insurance company will be paying out on death. The higher the figure, the higher the monthly cost.
The amount of life cover should match the amount borrowed.
2 The policy term
Our chances of dying increase as we get older. A longer term policy will cost more than a shorter term policy.
The policy term should end at the same time as your mortgage.
3 The type of policy
Some plans pay out a fixed lump sum on death, while others pay out a reducing amount, and some may accrue a small cash value.
Different plans will have different monthly premiums.
4 Your age
The older you are the more you pay.
5 Your health
Your health and weight are important factors in how much you will be charged.
People who are overweight, or have medical conditions, may find that they have to pay higher premiums.
Types of life insurance
This policy is specifically designed to protect a repayment mortgage. With a repayment mortgage your balance decreases each year, eventually reaching zero (yay!).
A decreasing cover policy will aim to broadly follow this decreasing loan amount. So the amount covered in year 1 will be a lot different to the amount covered in year 10 etc.
The premiums are fixed and the policy has a set term. This is the cheapest cover for a repayment mortgage and can be set up as single or joint.
Level term assurance covers you for a fixed lump sum, which does not decrease but remains level throughout the policy duration. It’s slightly more expensive but does provide a higher value of cover.
It is suitable for an interest only mortgage or part and part mortgage. However, lots of borrowers will choose this policy, even though they have a repayment mortgage, as it leaves their dependants with some additional money, at very little extra cost.
The premiums are fixed and the policy has a set term. Can be set up as single or joint.
Single life cover protects just one person and provides a cash sum payout if the policyholder dies during the term. If you and your partner each take out single life insurance policies, then the protection continues even after one of you dies during the term.
Your monthly premiums will be higher for two single policies than for one joint policy.
Joint life cover insures both you and your partner. If either of you dies during the policy term, the surviving partner receives a cash payout which can be used to pay off your mortgage.
The policy ends when the first partner dies.
This provides optional protection in the event that you are diagnosed with one of the specified medical conditions during the policy term, without dying.
It would cover things like; stroke, heart attack, certain cancers, multiple sclerosis etc
Critical illness cover can be added to a life insurance policy or taken out separately.
Can you get a mortgage without life insurance?
Yes, it’s completely possible to get a mortgage without buying a life insurance policy as well.
In years gone by you would have been expected to take out a life cover policy or an endowment policy. Lenders are no longer allowed to make it a condition of granting a mortgage, so the choice is yours.
However, unless the mortgage is for an investment property (buy to let etc), there’s usually a strong and sensible case for having the mortgage covered by life insurance.
Do mortgages automatically have life insurance?
No, mortgages do not come with life cover, this is something that always needs to be set up with an insurance company. The monthly payments will also be separate.
Why you might want life cover to protect your mortgage
A mortgage is a large debt and this debt will remain in place should you die.
If you are living with a partner, or have dependants, then the burden of that mortgage will fall to them if there is no life cover in place. A simple life assurance policy can payout enough money so that the mortgage is fully repaid on death. So your dependants don’t have to worry about paying the mortgage when you are gone.
Can my mortgage be refused if I don’t have life cover?
Your mortgage application won’t be refused just because you don’t have any life cover.
Ask your mortgage broker, or the lender, to provide further information so you can understand why they have rejected you.
There are a number of reasons that could cause this, such as:
- Poor credit
- Credit history
- Affordability
- Property defects or valuation
- Debt to income ratio
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Buying a home with someone else
It’s important to consider life cover when buying a house with someone else.
The mortgage will most likely have been calculated using both of your salaries. If you or your partner died, would the survivor be able to afford the regular mortgage repayments?
Life insurance can be setup regardless of the relationship you may have with the other person, as long as you are both party to the mortgage.
For example, all of these are OK:
- Married couple (obvs)
- Co-habiting
- Living with sibling
- Living with family member
- Living with friends
If you live alone, life insurance is not a pressing need alongside your mortgage.
In the event that you pass away before repaying the loan, it will convert into debt against your estate to be paid off prior to any money being passed on to beneficiaries.
Can you cancel life insurance after getting a mortgage?
Yes, with most monthly paid policies you can cancel at any time. You will immediately lose the life cover included in the policy.
Should you wish to take out cover at a later date then this requires a new application form and will be based on your age and health at that time.
What if I don’t have a mortgage?
If you don’t have a mortgage then there’s an understandable tendency to believe that life cover is not needed.
And for some this may be valid.
Property owned outright
If you own an unencumbered property then there is no need to have ‘mortgage’ life insurance. However, you may still want to provide for your dependants in the event of your death, and a family life policy can do this.
Renting
Again there’s no need or requirement to pay for ‘mortgage’ cover if you are renting. But it is sensible to consider how one of you would be able to afford the rent if the other died. A life policy could be setup to fund the rent for a certain period of time, or so that it’s possible to buy a house and stop renting.
What insurances are needed to get a mortgage?
The only insurance that’s required when taking out a mortgage is buildings insurance. This covers damage to the property itself and will be stipulated in the mortgage terms. Cover only applies to the structural aspects of your home: walls, roof, floors, fixtures and fittings etc. not the actual contents.
Things to consider
Life cover can take a little while to set up and the cost increases with age. So the cheapest time to buy a policy is generally right now.
If you would like further information then we can arrange for a mortgage broker to contact you and discuss some options.
