A simple guide to mortgage life insurance

October 3rd, 2022
A simple guide to mortgage life insurance

Thinking about what might happen in the future rarely includes considering an early death, but if you have a partner or children, it can make a big difference to how they might carry on if you were no longer around. That’s why life insurance has become such a popular type of policy in the UK, with just under 20 million people opting to protect their loved ones with this kind of cover [1].

And, when it comes to life insurance, there are different types available, such as mortgage life insurance, which, as the name suggests, can provide a valuable reassurance to those who own a property with a mortgage secured upon it.

The Benefits Of Having Life Insurance

There are a number of benefits to having a life insurance policy in place. After all, we cannot predict when the worst might happen, and, by having life insurance cover, you and your loved ones can enjoy a degree of peace of mind that tragedy won’t be compounded by financial woes. Your life insurance benefit amount can be used to pay for your funeral along with any burial costs, without your next of kin having to find the funds themselves. It can also be used to pay off any other debts that you may have outstanding.

What Is Mortgage Life Insurance In The UK?

Life insurance is intended to provide continuity for a partner or dependants who may be financially affected by the policy holder’s death, and, as such, it is meant to be used to pay for things including everyday expenses, children’s education, rent, or even mortgage payments. Its main appeal is to eliminate the worry of your loved ones being faced with financial difficulties if you are no longer there to support them.

Whilst its goal is also to alleviate concerns about money, mortgage life insurance is a little different. Also known by the name of mortgage protection, this type of insurance is purely intended to provide financial cover for any outstanding mortgage loan, and aims to give the surviving partner or children the security of being able to stay in their home without the worry of having to sell and move, or of having to make the mortgage repayments themselves.

It’s important to understand that mortgage life insurance, or mortgage protection insurance, is very different to mortgage payment protection insurance. Mortgage payment protection insurance, or MPPI, is not intended to provide a benefit sum if the policyholder were to die, but instead provides financial cover for the mortgage payments if the policyholder were to fall ill with a long-term illness, or become injured in a way that prevented them from making their agreed mortgage repayments. It is possible, however, to add critical illness cover to a mortgage life insurance policy, which will mean that your mortgage payments will be also be safe should you become seriously ill (such as suffering a heart attack, stroke, or cancer) and become unable to make your mortgage payments.

How Does Mortgage Life Insurance Work?

Like standard life insurance, mortgage life insurance will require the policyholder to make regular premium payments, in order for their beneficiaries to access an agreed cover amount in the event that the policyholder were to pass away during the agreed term of the insurance policy.

There are two types of mortgage life insurance policies: decreasing term, and level term. Decreasing term is the most popular choice, and is also the cheaper of the two, as the cover amount reduces as your mortgage shrinks over time, making it ideal for use with repayment mortgages. Your monthly premiums will not grow smaller, however. Level term policies, meanwhile, keep the agreed benefit amount the same for the duration of the policy This means that it can be a good choice for those with an interest-only mortgage, although monthly premiums will likely be higher than with decreasing term cover.

A key benefit of mortgage life insurance over standard life insurance is that as time goes on, with a repayment mortgage, the amount to be paid out reduces too, meaning that premiums for this kind of insurance are around 30% cheaper than life insurance that will pay out a fixed sum upon your death [2]. However, unlike with standard life insurance, your beneficiaries won’t be able to use the benefit amount to pay for any other expenses, such as your funeral, or general household costs.

If you are wondering “what happens to life insurance when mortgage is paid off?”, the answer could surprise you. If you succeed in the total repayment of your mortgage, this will mean that your beneficiaries will receive no payout if you die.

Do You Need Mortgage Life Insurance?

If you own a property which still has a mortgage secured upon it, you may need to think about taking out mortgage life insurance. However, a number of factors will determine whether it is necessary for your circumstance. If you are single, without children or other dependants, then it probably doesn’t need to be a priority for you, although the person who is to inherit your home in the event of your death will need to take on the remainder of the mortgage debt. This means that in practical terms, the beneficiary of your property may need to sell it if they cannot pay off the mortgage loan, or alternatively, they may decide to take out a new mortgage loan for this amount.

If you are married, or have children who are still living with you in the home, then taking out mortgage life insurance becomes more relevant. If your surviving partner would be unable to take over the mortgage payments in full, then this could well be a useful safety net that will allow your family to continue to live in the property. If you purchased your home with a partner, then it could be a valuable type of insurance to consider, as your mortgage will have been calculated according to the sum of both of your incomes. If one of you were to pass away, the extra financial burden could therefore be extremely difficult for the surviving partner to meet. It’s important to note, however, that if you already have a life insurance policy in place, then it probably won’t be necessary to take out additional mortgage life insurance cover.

You may also wish to consider taking out life insurance if you are planning on using the home as a rental property.

What Life Insurance Do I Need For A Mortgage?

If you are taking out a mortgage on a property, then you won’t necessarily need to take out mortgage life insurance, or, indeed, any type of life insurance at all. There is actually no legal requirement for home buyers to take out life insurance, so the answer may depend on the mortgage lender that you choose. Some mortgage lenders insist that their borrowers take out life insurance cover as a condition of being granted their mortgage loan, so find out early on if this could be the case to avoid any potential surprises later on in the application process.

This is because a home is a significant financial purchase, with the Land Registry figures for 2021 showing that average house prices have reached a staggering £265,668 [3]. As well as being a safety net for your loved ones, life insurance can give your mortgage provider the confidence to lend such a large sum, without taking on the expense and risk of potentially having to repossess the home later on.

How Much Does Mortgage Life Insurance Cost?

There is no simple answer to this question, as there is no “one size fits all” mortgage life insurance product available. There are, instead, a great many different factors that will have a part to play in the cost of your monthly mortgage life insurance premiums, which the insurance company will use to assess the level of risk to themselves. Therefore, you can expect to be asked questions relating to your health, lifestyle, and general fitness levels, including any medical history of serious illness.

The amount of cover that you require will also have an impact on the cost of your mortgage life insurance premiums. Those homeowners with only a small amount left to pay on their mortgage loan, can typically expect to be quoted lower premiums than someone who has a much larger sum still to be repaid.

There is also the choice between guaranteed premiums and renewable rates. When you opt for guaranteed premiums, you will be paying the exact same amount for your mortgage life insurance cover throughout the duration of your cover period. Renewable rates, meanwhile, mean that the cost of your monthly premiums will be subject to change, and whilst this means they could become cheaper, it also means that they could become more expensive.

Choose The Right Cover For Your Needs

As with any financial commitment, it’s always important to do your own research before signing on the dotted line. After all, a mortgage life insurance policy will require you to continue making the payments for the entire duration of the agreed term, so you must be sure that you can afford this amount, even if your circumstances were to change.

A good way to find out just what you can afford is to make use of one of the many free tools available online. An affordability calculator such as the one found here [4] is a smart way to get a clear picture of what you can spare for a mortgage life insurance premium every month, as well as providing a useful insight into any areas where you could be able to make savings. The calculator will take in factors such as your income, typical monthly outgoings, any other debts, and savings.

Next, you’ll want to find out just how much cover would be appropriate for your needs. Again, there are plenty of free, easy-to-use mortgage life insurance calculator online tools available, which will take account of your mortgage amount and any other other debts, to assess how much money your loved ones would need to cover the mortgage if the worst were to happen. Whilst it can be tempting to simply opt for the highest level of insurance cover that’s available to you, it isn’t a smart financial move. The higher the insurance benefit amount, the higher your monthly premiums will be, so be careful to choose a mortgage life insurance cover level that is sufficient for your dependants’ needs, and no more.

Once you know how much cover you will want from a mortgage life insurance policy, it’s time to compare the deals from different insurance companies. Using a comparison site such as Free Price Compare can be a good way to get an overview of many different mortgage life insurance quotes, but be sure to look carefully at the small print before committing to a policy. Don’t be swayed by any free gifts that may be offered to you, and instead look at testimonials from existing customers, and other key information to make sure that you make the best possible choice.

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