Do you need life insurance for a mortgage?
10 October 2022
Is life insurance essential when applying for a mortgage?
The simple answer is no, you do not need life insurance for a mortgage. There is no legal requirement to have life insurance to get a mortgage. However, some lenders may insist that you either have a policy in place or apply for a new policy to secure a mortgage from them. Having life insurance is popular amongst homeowners as a way of protecting your family from large debts or having to leave the family home in the event of your passing.
What is life insurance?
Life insurance is a type of policy that will provide financial support to your close family in the event of your death. This financial support is designed to minimise the financial impact of your death upon your family, helping to provide peace of mind to your loved ones. The financial support is usually a lump sum provided to your loved ones that will enable them to cover outgoing bills such as the mortgage payment, household bills and childcare costs.
Within the context of mortgages, there are two main types of life insurance policies that are relevant. These are decreasing term assurance and level term assurance.
Decreasing term assurance - Mortgage Life Insurance
The decreasing term assurance is a type of life insurance designed to protect the repayment of the capital and interest of the mortgage. As is suggested by the name, the value of this insurance decreases as you continue to pay off the mortgage, as the total amount the life insurance would need to cover in the event of your death is also decreasing as you pay the mortgage off. In the event of your death, the life insurance provider would likely pay out a lump sum equal to the value of the remainder of the mortgage, meaning that the home is debt-free for your family.
Level Term Life Insurance
As the name suggests, a level term is a type of life insurance where the premium and the level of cover remains the same throughout the policy term, regardless of when the insured person passes away. With this type of life insurance, the financial assistance can be used to help your family to cover various costs, such as the interest of a mortgage repayment.
It is worth noting that the fixed cash sum payout is not tied to inflation, so the total is vulnerable to increases in rising living costs. Additionally, a life insurance policy may also be considered as part of your estate, which means that it could be subject to inheritance tax.
How does life insurance work?
Both types of life insurance, decreasing term assurance and level term, pay out a lump cash sum upon either your death or a terminal illness diagnosis with a life expectancy within a certain time frame.
The lump cash sum that your beneficiaries would receive is determined by a range of factors, such as which type of life insurance you took out, as well as which level of cover you opted for. You can take out life insurance out under either single or joint names, and premiums can be paid for either monthly or annually.
Should you get life insurance?
As with every financial decision, there are plenty of factors to consider when deciding whether life insurance is right for you and your financial situation. The perks of taking out a life insurance policy is that it will provide financial peace of mind to your loved ones should you pass away. Something to consider when debating whether to get life insurance is how your loved ones would be financially impacted should the worst happen to you.
Other insurances to consider when buying a home
As your property is likely to be your largest asset, many homeowners choose to protect their home through insurance policies. The only legal requirement is buildings insurance, however the other types of insurance can help to provide an extra peace of mind.
Buildings Insurance
Buildings insurance covers you against the cost of repairs should your home be damaged. It typically covers structural features such as the walls, windows and roof, as well as permanent fixtures such as fitted kitchens and bathrooms. Every policy is different so the extent of what is and isn’t covered might vary.
Mortgage Payment Protection Insurance (MPPI)
MPPI policies, also known as Income Protection, cover your mortgage payments for a period of time should you fall ill, get injured, lose your job or you are unable to work. This financial protection can cover your mortgage payments typically for up to one year or until you are able to return to work. MPPI policies sometimes include upper limits to the repayment value, so it is important to understand the full details of the policy to check whether your full mortgage payment would be covered. Payment Protection Insurance is optional. There are other providers of Payment protection Insurance and other products designed to protect you against loss of income.
Contents Insurance
Whilst not directly linked to mortgages, contents insurance helps to provide financial cover for your possessions inside your home in the event of fire, flood or theft. Depending on the level of cover and the policy itself, there are other eventualities that may well be covered, such as covering possessions such as laptops and phones even when you aren’t at home. Again, every policy is different so it is vital that you fully understand any policy before agreeing to it.
At About Mortgages, we are able to tailor a protection pack to help protect your financial future. We can help with life insurance, critical illness cover, income protection as well as buildings and content insurance. Contact us today for more information.