What is mortgage life insurance?
Mortgage life insurance, as the name suggests, is a policy designed to pay off your mortgage with a cash lump sum pay out, if you were to die during the term.
Sometimes mortgage life insurance is also referred to as ‘decreasing term life insurance’, ‘mortgage protection’ or ‘mortgage protection life insurance’.
Cover usually aligns with your mortgage term, protecting your family home and dependants, should anything happen to you.
Therefore, if you have a 25-year mortgage term, your mortgage life insurance policy would run for at least this length of time.c
There are two types of life insurance commonly used to cover a mortgage. The more common, decreasing term, as well as level term.
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Who might need mortgage life insurance cover?
A mortgage is likely to be the largest debt the vast majority of us will incur during our lifetime.
Very few people are lucky enough to have the funds to buy a house outright. Therefore, a mortgage is necessary if we are to own a home.
Often, a property purchase is much more achievable if we take out a joint mortgage, with our spouse, partner or a friend.
But what would this mean for the surviving partner and possibly children, if one of you was no longer around?
- Could you afford the monthly mortgage repayments?
- Could you afford on-going household bills? (See this infographic from More Than on the cost of running a home »)
- Could you maintain your current standard of living?
- Would you have to downsize your property/move to a new area?
- Would you need to return to work to provide an income?
The Money Charity in the UK reports:
- £121,687 is the estimated average outstanding mortgage per household
- 35% of UK households have no savings whatsoever
- 52 mortgage possession claims and 37 mortgage possession orders are made every day.
These UK statistics emphasise just how important protecting your mortgage with life insurance cover really is.
See data from their February 2018 report, to see how you compare »
Having adequate mortgage life insurance protection in place is vital for homeowners who do not want to burden their partner with unaffordable mortgage repayments in the event of their death.
Mortgage life insurance can also provide you with complete peace of mind, knowing that your family will not be forced into an unwanted change of lifestyle.
Types of mortgage protection cover
There are 2 main types of life insurance available to cover your mortgage:
- Decreasing term. Very common – normally taken out to cover a repayment mortgage
- Level term. Normally taken out to cover an interest-only mortgage (where the balance does not decrease).
As with any life insurance cover, the policy you choose will be dependent on your budget, age, health, whether you have children and the level of protection you require.
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Decreasing term vs level term
A decreasing term life insurance policy is the most common and cost-effective option to protect your mortgage.Decreasing term is designed to help protect a repayment mortgage. The amount of cover you receive (the pay out) reduces over time in line with your decreasing mortgage balance.
This means your beneficiaries would receive enough money to pay off the house, but not much else. If you have children too you may require more coverage.
Because the financial risk to the insurer reduces during the term, this helps keep monthly premiums low, compared with level term cover.
With level term life insurance, your level of cover protection remains the same throughout the policy.
This means, if you die at any time during the term, your beneficiaries would receive a fixed lump sum, regardless of whether that is at the start or the end of the policy.
Because the insured sum stays fixed over the term, your monthly premium payments are likely to be higher, compared to decreasing term cover.
If you have an interest-only mortgage, level term cover would normally be better suited to your needs, in order to pay off the full balance.
An advantage of level term cover is that your dependants are likely to receive more funds than are needed to pay off the mortgage.
So, as well as paying off the house, there will be additional funds left to cover other expenses, such as expensive funeral costs or on-going living costs.
This could be a good option if you have children and want to provide for their future needs too i.e. further education.
Read our blog post on decreasing term vs level term cover »
Is mortgage protection insurance compulsory?
Generally, no. Mortgage protection life insurance, although a very good idea, is not usually compulsory.However, some mortgage lenders may request that you have life cover in place before agreeing to release funds, ensuring their risk is protected.
You also do not have to buy a policy directly from your mortgage provider or estate agent. Normally, you can secure a much better deal if you compare multiple quotes or use a broker.
If you have cover, then purchase a property, do you still need mortgage life insurance?
This depends on your individual circumstances.If you already have life insurance in place, perhaps to protect your family, and then purchase a property, you will need to assess whether your new level of debt requires additional protection.
If you do require a greater level of protection you have two options. You could cancel your existing policy and take out a new one with more coverage, or take out a second policy specifically to cover your mortgage.
Who receives the pay out?
The pay out is made directly to your named beneficiaries, (often your spouse or partner), and not the mortgage provider.Although the policy pay out is intended to pay off your mortgage debt, beneficiaries can use it for whatever they wish.
Write your mortgage life insurance in trust
In life insurance terms, a trust is simply a legal arrangement designed to ensure that the pay out from your policy is distributed as you intended.The policy is looked after by a trustee until the time comes for the benefit to be released to your beneficiaries.
Because the policy has been written in trust to the trustee/s, the proceeds avoid forming part of your legal estate.
The key benefits of writing your policy into trust are:
- Avoid or minimise 40% inheritance tax (over the £325,000 threshold)
- Avoid the lengthy probate process (for a faster pay out)
- Have more control over who gets the funds and when.
Joint vs 2 single policies
It can be tempting to think that the ‘joint’ approach is the way to go. You may already have a joint mortgage and bank account together, so why not a joint life insurance policy too?There may be a small saving to be made by taking out a joint policy, rather than 2 singles policies. Also, if you are married and have no dependants, it is often easier to set up a joint policy.
However, it is important to remember that a joint policy will only ever pay out once, normally on first death. If you have dependants it may be more beneficial to take out single policies, providing 2 pay outs.
Another consideration is, what if the relationship breaks-up? If you have a joint policy, this is likely to mean you will have to cancel the policy.
You would then need to take out a new policy when you are older, paying higher premiums.
Guaranteed vs reviewable monthly premiums
Critical illness cover
You can opt to include a critical illness element on your mortgage life insurance policy.Critical illness cover will pay out a lump sum if you suffer a life-changing illness. A critical illness is likely to affect your ability to work, however, is not expected to result in your death within 12 months.
It often includes conditions like heart attack, stroke, cancer, deafness, and MS. All these conditions will have a major impact on your ability to work, earn and look after yourself going forward.
Please note: Not all critical illness cover is the same and different policies will include different conditions/illnesses.
Terminal illness cover
Most mortgage life insurance cover now offers terminal illness as standard.Terminal illness cover protects you if you are diagnosed with a serious illness by a medical professional, and are predicted to die within 12 months. A common terminal illness would be an advanced form of cancer.
Having access to your life insurance proceeds early could help clear your mortgage, pay for required house alterations or a home carer.
Is 'mortgage life insurance' the same as 'mortgage payment protection insurance' (MPPI)?
No. Do not confuse mortgage life insurance, with mortgage payment protection insurance (MPPI).MPPI is designed to pay your mortgage for a period of time if you become too ill to work, or are unemployed. Whereas mortgage life insurance covers your mortgage debt if you die.
As part of the PPI fiasco many people in the UK were wrongly sold MPPI and in recent years they have reclaimed funds from their provider.
When might you not need mortgage life insurance?
If you do not have any dependants and are single, then you may not require mortgage life insurance.Remember, this protection is about paying off your mortgage if you were no longer around. Therefore, if you have no one you want to pass your property onto, then it may not be necessary.
However, most of us do have a partner and/or children who rely on our income in order to run the home. If your dependants would struggle to pay the mortgage and the associated costs in your absence, then life cover is a cost-effective way of providing thorough protection.
Video transcript (mortgage life insurance)
What is mortgage life insurance?Well, put simply, it’s taking out a life insurance policy for the purpose of protecting your home and loved ones, should anything happen to you.
For most of us, a mortgage is likely to be the largest debt that we will incur.
Could your partner afford to pay the mortgage and all the associated costs of running the home, if you were no longer around?
There are 2 policy options available:
Decreasing term, where the cover amount decreases in line with your repayment mortgage balance.
And level term, where your beneficiary receives a fixed lump sum if you were to pass away at any point during the term – regardless of whether this is at the start or the end of the policy.
Level term cover is often used to cover an interest-only mortgage where the capital borrowed does not decrease over time.
Here’s how it could work in practice:
Peter and Julia are first-time buyers with a twenty-five-year repayment mortgage.
To keep up with the repayments, they rely on both their salaries, leaving them with little disposable income.
To safeguard their home and each other’s financial future, they take out a joint decreasing term policy.
They pay one premium and should anything happen to either one of them, the balance would be cleared in full.
Desmond and Eva, on the other hand, have an interest-only mortgage and opt for two individual-level term policies.
They have three young children, and this option provides extra financial security for the whole family.
They set their cover amount to exceed their mortgage to ensure they could also meet future living costs.
Because they have two single policies this means paying two monthly premiums.
However, their loved ones could receive two separate pay outs, doubling the level of protection.
Reassured have helped protect over 300,000 families in the UK and we know from experience that no two families are the same.
That’s why we work with to find your perfect life insurance policy.
We are independent, impartial and never charge a fee for our services.
Protect your family’s future with Reassured.
Mortgage life insurance in summary:
- A great option if you have dependants and/or a mortgage
- You can protect your mortgage with decreasing or level term cover
- Although a great idea, it is usually not compulsory
- There is no cash-in value to decreasing or level term policies
- You can include critical illness and terminal illness options
- You can write your policy in trust to maximise the pay out
- Mortgage life insurance and MPPI are not the same things
- If your mortgage changes you should review your cover, (do not be under or overprotected)
- If on decreasing term, ensure the interest rate on your mortgage does not exceed the interest rate on your policy
- If you have taken out cover through a lender, you can switch and possibly make a saving.
Why use Reassured to secure the best mortgage protection policy?
- We have vast experience securing 1000’s of customer’s comprehensive mortgage cover
- Life insurance is what we do, (it is all we do), day in and day out
- We will search the market on your behalf, finding the most suitable and competitive quotes
- 16,500 cannot be wrong! We have an ‘Excellent‘ average Trustpilot rating – 9.6/10
- We are completely independent, impartial and never charge you a fee
- There is no obligation to take out your personalised quote
- We are a non-advised brokerage – we simply listen to your unique circumstances and find the most suitable quotes.