Do I have to take out life insurance if I have a mortgage?

Your mortgage is likely to be the biggest financial commitment you ever make. Borrowing hundreds of thousands of pounds to buy a home is a huge undertaking, and so you need to be sure you’re making the right choices.

One of the major issues you should think about when you take out a mortgage is: how can I make sure my family and I can continue to make the repayments?

Not keeping up with your mortgage payments can lead to arrears and, ultimately, a lender repossessing your home. So, it’s vital that you think about how you can always ensure you can pay your mortgage.

While no one likes to think about death, it’s crucial you ask yourself what would happen to your mortgage if you were to die. Could your loved ones continue to make the payments? Would your family be able to stay in your home? Would it leave a significant liability to your parents or children?

In the past, many lenders would insist that you took out life insurance when you arranged a mortgage. They wanted to be sure that the debt could be repaid in the event of your death.

Now, however, the choice is generally yours.

When you buy a home, you’ll often face countless other bills, from buildings and contents insurance to utilities. Life insurance can seem like just an additional expense at a time when money might already be tight.

However, putting the right life insurance in place if you do take out a mortgage can provide real peace of mind and security for your loved ones.

If you have a joint mortgage, partner, or family, life insurance is vital

While lenders won’t insist that you take out life insurance to get a mortgage, they will recommend that you consider doing so to protect those closest to you.

Lenders expect to be able to sell the house to get their money back if you die, and so life insurance isn’t about protecting them – it’s about protecting your loved ones.

If you have a partner or spouse that earns a good salary, you might think that they could simply continue to pay the mortgage. But, if they had to maintain all their other commitments, it might be hard for them to keep up the repayments.

And, if you have children, this could also be more difficult:

• If you are the main wage earner, could your partner and family continue to afford to live in your home if you were to die?
• If you care for your children, would your partner have to pay for additional childcare or give up their job if you died? If so, how would they continue to make the mortgage repayments?

If you want to ensure that your loved ones could continue to live in your family home if you were to pass away, life insurance can be invaluable as it can ensure any outstanding debt is repaid.

If you have no partner or dependents, cover can still be beneficial

A common question customers ask us is: “I’m single and have no children, so why would I need to pay off my mortgage if I die? Surely the bank will just sell the property and get their money back?”

In theory, this might be true. If no one depends on you financially, then why would you need cover?

However, it’s worth bearing a few issues in mind.

Firstly, if you are single and have no dependents, when you die your property (and mortgage) will pass to your parents. Could your parents afford to pay the mortgage? If they have already retired, can they afford to make the repayments?

In some cases, a property sale can take months, or even years. Would your mortgage lender be willing to wait as long as it takes to sell before demanding the money back? 

In a worst-case scenario they could end up repossessing and selling the property at a rock bottom price at auction. This can mean your parents would get a fraction of the money you have paid for the property or, even worse, still owe money to the lender if the property sells for less than the outstanding mortgage.

Also, there is the potential issue of negative equity. If house prices fall, there’s a chance your parents will get back far less than you put into the property. If it falls into negative equity (with more owing on the mortgage than the property is worth), they’d get nothing. 

Finally, even if there is plenty of equity and your parents could afford to maintain the mortgage while the property was sold, there is the issue of the stress it would cause.

At an already emotional time – they will have just lost a child – you then leave them with the headache of having to list and sell your home, and the paperwork and stress that brings.

Most of our customers choose protection because they want to make things easy for those they leave behind, and so taking out simple life insurance that would pay off the mortgage if you died would be an easy and cost-effective way to achieve this.

Your parents will then have the time and space to consider what they want to do with your property after you’ve gone.

2 types of cost-effective life insurance that can be ideal to cover a mortgage

If you are looking for a cost-effective way to ensure that your mortgage can be repaid if you were to die within the term, there are two main options.

Level term insurance

This type of protection pays out a fixed amount if you die within a specific term. For example, it would pay a fixed amount of £200,000 if you died within a 30-year term.

It can be useful if you have an “interest-only” mortgage where the amount you owe doesn’t reduce.

Level term insurance can also enable you to keep your life insurance when you move home – you may simply need to “top up” your cover with another policy if the amount you borrow increases.

Decreasing term insurance (or “mortgage protection” life insurance)

As the name implies, decreasing term insurance pays a reducing lump sum on death within a fixed term. For example, a policy might cover you for an initial £200,000 over 30 years, but the amount paid out would reduce over the term.

It’s ideal if you have a repayment or “capital and interest” mortgage where the balance decreases over time, and you want to ensure that the outstanding amount is repaid on death.

Joint – or single-life cover?

If you’re taking out a mortgage with another person – a spouse, partner, or friend – and you’re reliant on both incomes to make the repayments, it can pay for you both to take out cover.

You have the choice of a joint-life policy, or you can take out individual protection in your sole name.

Find out more about the pros and cons of single- and joint-life insurance in our guide.

We’ll help you to find the right mortgage life insurance

As life insurance experts, we work with many customers every year to help them find the right protection for their mortgage.

We can scour the market to find the most appropriate cover, and we can also help you if you’re thinking about adding additional benefits such as Critical Illness cover or Income protection.

Get an online life insurance quote in minutes, or speak to one of our experts if you have any questions.