Written by: Andy Walton - Proposition Director - Protection
Having life insurance in place can help give you peace of mind should something happen to you. It means your home and your family are safe should you pass away. Life insurance isn't mandatory to get a mortgage but there are benefits to having it!
It might not always be clear which protection insurance policies you legally need to get a mortgage, and which are optional (but beneficial). We’re here to clear that up.
Life insurance for mortgage
One of the main reasons why you should take out life insurance is to ensure that your family is able to carry on paying the mortgage, in the event of your death. The consequences of not being able to pay the mortgage could end in your family being forced to sell their home and move out, which is not the sort of thing they should be worrying about during a time like that.
While you do not need to take out a life insurance policy in order to get a mortgage, having one in place can be very helpful.
Financial resilience means having plans in place to help if something happens to you, whether it's paying for monthly costs while you recover from illness or giving your family peace of mind. You can test how financially resilient you are by using our handy tool below:
Check your financial resilience with our risk assessment tool
See how well you're protected when life throws the unexpected at you.
For further information about different protection insurance policies and how they could help keep you in your home once you’ve moved in, speak to one of our expert protection advisers today.
The only insurance that is required legally when getting a mortgage is buildings insurance.
What kind of insurance do I need to get a mortgage?
Buildings insurance covers your home against any damage that may need to be repaired. This type of insurance only applies to the structural aspects of your home i.e. the walls, roof, floors, fixtures and fittings etc. not the actual contents of it. Lenders need to know that you have buildings insurance in place, as their primary concern is the value of your property.
For instance, if a fire were to break out in your home and you didn’t have buildings insurance covering the cost of repairs, the house wouldn’t be worth the amount of money you borrowed. This means that ultimately, the lender wouldn’t be able to get their money back.
Ultimately, this is why buildings insurance is a legal requirement when you get a mortgage, whereas life insurance isn’t.
Do you need life insurance when buying a house?
While you don't need life insurance when buying a house, it is highly recommended. There are different types of life insurance policies suitable for homeowners. A common choice is decreasing term life insurance. The coverage amount reduces over time, mirroring the decreasing balance of your mortgage.
Why should you consider life insurance for a mortgage?
Life insurance ensures that your mortgage is paid off, preventing your family from facing the burden of mortgage payments, which could lead to financial hardship or even the loss of the home. This financial safety net allows your beneficiaries to inherit a home free of mortgage debt, offering significant relief and stability during a difficult time. The assurance that the mortgage will be covered provides peace of mind, both for you and your loved ones, reducing stress and allowing for more comprehensive financial planning.
Also, life insurance for a mortgage is a cost-effective way to secure your family's future. Term life insurance policies, which are often the most suitable for this purpose, can be relatively inexpensive, providing substantial benefits at a manageable cost. These policies can be tailored to match the term of your mortgage, ensuring that coverage is in place precisely when needed.
How much does life insurance for a mortgage cost?
Life insurance costs can vary a huge amount, depending on the policy you decide to take out. Generally, the cost is influenced by the type of policy you choose, with term life insurance typically being more affordable than whole life insurance. Term policies, often selected to match the duration of the mortgage, provide coverage for a specific period and are designed to pay off the mortgage if the policyholder passes away during that term.
How long should you get life insurance for?
The duration for which you should get life insurance largely depends on your specific financial obligations and personal circumstances. Typically, people choose a term that matches the length of their major financial commitments, such as a mortgage. If you have a 25-year mortgage, for instance, a 25-year term life insurance policy would be a sensible choice, ensuring that the mortgage is covered if you pass away within that period. This alignment helps ensure that your family can maintain their home without the burden of mortgage payments in the event of your death.
Beyond matching the mortgage term, you should also consider other factors such as the age of your dependents and your overall financial plan. If you have young children, you might want a policy that extends until they are financially independent, perhaps through their university years.
Frequently asked questions
Financial risk is how likely you are to experience financial setbacks due to unforeseen factors, such as death, critical illness, disability, and job loss.
Financial risk can be caused by a variety of circumstances. Some of these factors are in your control, like your level of insurance, whereas others are external, such as the economic climate and health issues.
By taking out protection policies, you can minimise the impact of these financial risks. This can be income protection or other forms of insurance, and also by having a healthy emergency fund, in case you face any financial risks that aren’t covered by your insurance.
Income protection offers financial support if you’re unable to work due to illness or injury. It replaces part of your income and will continue to pay out regular, tax-free instalments until you’re able to return to work.
Financial stability means you have enough income to cover your expenses and have a buffer for emergencies (protection policies and savings). Our Financial Risk Assessment can help you assess your current situation and inform you if any improvements could be made.
Unpredictable events can hurt your finances. Take a free Financial Risk Assessment to identify your vulnerabilities and explore protection options that plug the gaps, giving you peace of mind.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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