Do you need life insurance for a mortgage?
When you take out a mortgage, you will normally be asked (by mortgage brokers) about life insurance too.
Amid all the costs that go along with buying a new property, the last thing you will want is another expense to consider. But for many homebuyers, life insurance will be a sensible investment.
Here Telegraph Money takes a closer look at the need for life insurance when you take out a mortgage and explains the options.
Is life insurance a legal requirement when you take out a mortgage?
Although your lender or mortgage broker will likely encourage you to arrange life insurance when you take out a mortgage, there’s no legal requirement to buy it nor will it be a condition of you getting your loan (as it is with buildings insurance, for example).
Whether or not it makes sense for you to take out a life insurance policy will depend wholly on your personal circumstances.
Why you might need life insurance
Life insurance is most important if you will be sharing your home with a partner or children that rely on you financially.
This is because it will give them the money they need to pay off the mortgage if you were to die during the term of the policy. Life insurance can provide invaluable financial breathing space during an incredibly stressful time. It will also give them the peace of mind that they won’t lose the roof over their head.
Life insurance is less important if you live alone as the sale proceeds of the property can be used to repay your mortgage.
However if you would like to leave your home to somebody else – a friend or another family member, there’s nothing to stop you taking out cover to protect it.
What are my life insurance options?
The cheapest type of life insurance is decreasing term insurance. Here the amount it pays out if you die shrinks in line with your outstanding mortgage. It means the money will always be there to pay off your loan but there won’t be any additional funds to cover other expenses. You might also hear this type of cover described as mortgage life insurance.
The alternative is level term insurance which pays a fixed amount, irrespective of when during the term you die. As the pay-out doesn’t decrease over time, it’s the more expensive option but it means there may be money left over for other expenses, once the mortgage has been repaid.
Both level and decreasing term insurance policies can be bought on a joint basis. This allows two people to be covered by one policy and it’s usually cheaper than buying two single policies.
However the catch with joint policies is that most plans will only pay out once, leaving one partner without cover after the other has died.
It’s also possible to combine critical illness cover with life insurance to create a policy that would pay out a lump sum if you died or suffered one of the serious conditions covered by the policy.
How much life insurance do I need?
The obvious answer to this question is to insure enough to repay your mortgage.
However it’s worth thinking beyond your home loan and taking the time to consider other expenses your loved ones would face in your absence and how much help they would need.
For example, if you have kids you might want to increase the sum assured to cover additional costs like school fees, university costs or wedding expenses on top of regular bills.
Life cover is usually very affordable (particularly if you are still relatively young and in good health) and it may only cost you a few pounds every month to increase the sum assured.
FAQs
Is life insurance necessary for a mortgage?
There is no legal requirement for you to buy life insurance when you take out a mortgage.
However it makes sense to take out life insurance if you live with a partner or children, to ensure that they don’t end up losing their home if you die during the term of the policy.
What happens to a mortgage without life insurance?
Any debts you have such as an outstanding mortgage will need to be repaid by your estate upon your death. Your home will likely need to be sold to repay it unless you have other sources of capital or income.
If you own your home with somebody else and have joint tenancy, they will inherit the property. But they will still be responsible for repaying the mortgage.
These problems can be avoided with life insurance as it will provide your loved ones with the funds they need to pay off the mortgage, if you die during the term of the policy.
How much does life insurance for a mortgage cost?
Life insurance is usually very affordable. According to comparison site IamInsured, the average single policy costs £9.71 a month.
How much you will need to pay depends on your personal circumstances as insurers will individually underwrite each policy. As a guide, the younger and healthier you are, the cheaper your life insurance is going to be because there will be a lower risk of you dying during the term of the policy.
In addition to any health problems that you might have, some lifestyle factors can also push up the cost your insurance, such as smoking or being overweight.