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Getting a mortgage is one of the main reasons why people take out life insurance. But do you actually need life insurance when you buy a house? We bring you up to speed with everything you need to know.
KEY INFORMATION
No, you don’t need life insurance when taking out a mortgage but it can be a very good idea to do so. If you have dependants like a partner and children who rely on your income, taking out life insurance gives a financial safety net that means your loved ones won’t need to worry about how to pay the mortgage if you die.
However, it can also be useful if you’re a landlord with Buy to Let mortgages on properties. By taking out life insurance to cover those mortgages, it means your loved ones won’t have to deal with making sure those mortgages are paid or have to sell the properties if they run into financial difficulties, if you die.
It’s extremely common for homeowners to take out life insurance when they get a mortgage. Having said that, 28% of homeowners aged 18-40 with a mortgage don’t have life cover to protect them and their families, research from Beagle Street has revealed. This means they don’t have the safety net of life insurance to support them if they passed away.
There are a number of different types of life insurance and the type of mortgage you have may influence which type you choose.
With mortgage life insurance, which is also known as decreasing cover, you take out a policy for a certain amount, say £200,000. Then the amount of cover decreases over time in line with your repayment mortgage, although your premiums will stay the same.
While with level term life insurance, the amount of cover remains the same for the duration of the policy. You may opt to take this out if you have an interest-only mortgage, such as on a Buy to Let property. Or you may want this type of life cover if you have a repayment mortgage so that your mortgage is paid off if you die with some money left over for other expenses.
When you take out an increasing cover policy, the amount you’ll be covered for goes up each year by a pre-agreed amount. This would cover a repayment mortgage or interest-only mortgage as well as helping to protect your loved ones from the rising cost of living in future years.
Unlike term life insurance which pays out a tax-free lump sum if you die, family income benefit gives tax-free payments to your loved ones each month, although payments can be made quarterly or annually. These payments can be used to cover your mortgage payments each month. Some people take a family income benefit policy out alongside a standard life insurance policy while others take it out on its own.
This is designed to pay out a tax-free lump sum if you’re diagnosed with one of the illnesses listed on the policy. While it’s not a type of life insurance as you don’t need to die to make a claim, you may choose to use the payout to pay off some or all of your mortgage if you become seriously ill.
Find the right life cover. Search the UK’s leading insurers using the service provided by LifeSearch
No, mortgage lenders do not make it mandatory to take out life insurance when you get a mortgage.
Yes, you can cancel life insurance if you have a mortgage because the lender doesn’t require you to have it in place. But think carefully before you cancel it. If you want to cancel it because you want to save money, it’s a good idea to speak to an adviser because they may be able to switch you onto a different type of life insurance which is cheaper.
Taking out a mortgage is usually the trigger for getting life insurance but it can also offer vital protection if you don’t have one. For example, if you’re renting with your partner and children, taking out a life insurance policy can offer financial security if you die. It could cover their rent payments or even be enough for them to buy a house.
And even if you’re living mortgage-free, if you have people relying on your income for living expenses, putting a life insurance policy in place offers financial protection for them if the worst happens.
The cost of mortgage life insurance varies depending on a number of factors but here are some examples:
Here’s how much premiums may cost for mortgage life insurance (decreasing cover) for a 30 year old non-smoker office worker with no health or lifestyle disclosures:
| Sum Assured | Term (Decreaing) | Monthly Premium |
|---|---|---|
| £200,000 | 20 years | £5.49 |
| £500,000 | 20 years | £10.01 |
Figures relate to guaranteed premiums. Prices as of 22/10/2024
While if the same person took out level term life insurance because they have an interest-only mortgage, here’s how much premiums may cost:
| Sum Assured | Term (Level) | Monthly Premium |
| £200,000 | 20 years | £6.84 |
| £500,000 | 20 years | £14.35 |
Figures relate to guaranteed premiums. Prices as of 22/10/2024
Find the right life cover. Search the UK’s leading insurers using the service provided by LifeSearch
When you take out mortgage life insurance to cover your repayment mortgage, you’ll want the policy to last for as long as your mortgage term. Your amount of cover will decrease each year in line with your outstanding mortgage balance. That way, if you die within the policy term, your payout should cover your mortgage.
While if you have an interest-only mortgage, your outstanding mortgage balance will remain the same during the term and you’ll need to pay off the full amount you borrowed at the end of the term. So similarly, you’ll want your life insurance policy to run for at least the length of your mortgage term. But you’ll need to get level term or increasing cover in order to have enough to pay off an interest-only mortgage if you die.
Buying a house is a huge financial commitment. The average UK house price is £290,000, according to Land Registry figures for November 2024. So if you’re buying a house and you’ve got people who rely on your income to pay the mortgage, taking out life insurance means they have financial security if you die.
If you don’t have any protection in place, your family may not be able to afford to stay in their current home and may need to sell it.
Find out how much your outstanding mortgage balance is, you can do this by checking your most recent mortgage statement, checking your banking app or by calling your lender. As well as considering the size of your mortgage, you’ll also want to consider when to put any additional cover in place to cover any other expenses like living costs.
When you’re buying a house, there are a number of different types of insurance to consider.
Yes, there’s no problem taking out joint mortgage life insurance with your partner, even if only one of you is named on the mortgage. Mortgage life insurance is the type of life insurance, it’s not tied to your specific mortgage.
When you take out a life insurance policy, you take it out over a fixed term. So if your circumstances change, you may wish to change your cover too. If you pay off your mortgage early, you may feel you don’t need life insurance anymore and may wish to cancel your policy.
Or you may wish to keep the policy running so that you have the benefit of a lump sum if the worst happens.
Find the right life cover. Search the UK’s leading insurers using the service provided by LifeSearch
Mortgage life insurance usually refers to a type of life insurance called decreasing cover life insurance. This means the amount you’re covered for reduced in line with the mortgage balance on your repayment mortgage.
HomeOwners Alliance Ltd is registered in England, company number 07861605. Information provided on HomeOwners Alliance is not intended as a recommendation or financial advice.
Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ, authorised and regulated by the Financial Conduct Authority (FRN: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
HomeOwners Alliance Ltd is an Introducer Appointed Representative (IAR) of Seopa Ltd, for home insurance, authorised and regulated by the Financial Conduct Authority (FCA FRN: 313860).
HomeOwners Alliance Ltd is an Introducer Appointed Representative (IAR) of LifeSearch Limited, an Appointed Representative of LifeSearch Partners Ltd, authorised and regulated by the Financial Conduct Authority. (FRN: 656479).
Independent Financial Adviser service is provided by Unbiased, who match you to a fully regulated, independent financial adviser, with no charge to you for the referral.
Bridging Loan and specialist lending service provided by Chartwell Funding Limited, registered office 5 Badminton Court, Station Road, Yate, Bristol, BS37 5HZ, authorised and regulated by the Financial Conduct Authority (FRN: 458223). Your property may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it.
