Do You Need Life Insurance for a Mortgage?

Do You Need Life Insurance for a Mortgage UK?

You don’t need life insurance for a mortgage in the UK.

If you die before you’ve repaid your mortgage the lender will need to be informed. If you have people living in your home then the lender will look at a way to establish whether your beneficiaries can remain in the home and afford to take over the mortgage. If they can’t take over the mortgage, then your beneficiaries will have to sell the home to pay off the mortgage or the property will be repossessed.

To avoid this happening, you can get traditional life insurance or a type of life insurance called mortgage protection insurance (also known as mortgage life insurance) which specifically covers the mortgage in the event you die during the mortgage term.

Traditional Life Insurance

If you opt for traditional life insurance, the insurers will pay out a lump sum to your beneficiaries which can also be used to pay off the mortgage as well as other expenses. This tends to be more expensive but offers a lot of flexibility as the money isn’t for any one purpose.

Life insurance typically takes 2 main forms:

• Term life Insurance: this type of life insurance covers you for a specified term, such as 20 or 30 years, and pays out if you die within this period
• Whole life insurance: this provides coverage for your entire life and pays out whenever you pass away, making it a more comprehensive option but expensive option

Mortgage Protection Insurance

Mortgage protection insurance is tailored to your mortgage debt. Often people with repayment mortgages will take out mortgage protection insurance on a decreasing term basis. This is where the insurance payout amount decreases in with the mortgage as it’s repaid over the years, resulting in lower overall premiums than traditional life insurance.

Although mortgage protection insurance is specifically designed to cover your mortgage in the event you pass away during the mortgage term, most policies are flexible in that you can pay for additional (or even alternative) mortgage protection cover for circumstances other than death. Obviously doing this can increase the premiums of the insurance if it’s added on to your existing plan, but many providers will offer competitive deals for certain policy bundles and tailored combinations of cover.

Here are some examples of the other types of mortgage protection.

Income Protection

Income protection is designed to replace a portion of your income if you’re unable to work due to illness or injury. This type of insurance can cover a significant portion of your salary, typically up to 70%, until you’re able to return to work or reach retirement age.

• Short-Term Policies: These provide coverage for a set period, usually up to one or two years.
• Long-Term Policies: These provide coverage until retirement or a specified age.
• Benefits: Income protection insurance offers broader financial support beyond just mortgage payments, helping with everyday living expenses.

Critical Illness Insurance

Critical illness insurance provides a lump sum payment if you’re diagnosed with a serious illness specified in the policy, such as cancer, heart attack, or stroke. This payment can be used to cover your mortgage, medical bills, and other expenses

• Coverage: Policies cover a range of serious conditions, but it’s essential to check which illnesses are included.
• Benefits: This insurance offers a one-time payout that can be used as needed, providing flexibility in how you manage your finances during a critical illness.

Redundancy Insurance

Redundancy insurance, also known as unemployment insurance, specifically covers your income if you lose your job through no fault of your own. This type of insurance helps cover your mortgage payments and other essential bills while you search for new employment.

• Short-Term Coverage: Usually covers a period of 12 months or until you find new employment.
• Benefits: Provides targeted financial support during periods of unemployment, ensuring you can keep up with your mortgage payments.

What Happens if I Die with No Mortgage Life Insurance?

If you pass away during the mortgage term with no mortgage life insurance or other life insurance in place, then the lender will need to be informed to make suitable arrangements to see if another family member(s) can take over the mortgage debt. If they can’t then they will need to sell the property otherwise the lender will have it repossessed.

What Can I Do if I Don’t Take Out Life Insurance or Protection?

Building a robust savings and emergency fund is an effective way to protect against unexpected financial hardships. Having 3 – 6 months worth of living expenses saved can provide a buffer to cover mortgage payments and other essential costs during tough times.

Key points to bear in mind are:

• Liquidity - savings are immediately accessible without the need to go through a claims process
• Control - you have complete control over how the funds are used, offering maximum flexibility

Can You Get a Mortgage Without Life Insurance UK?

Yes you can get a mortgage without life insurance in the UK.

You don’t have to have life insurance for a mortgage. It’s not compulsory but getting some sort of cover to protect your home can be incredibly valuable, particularly if you have dependants or other family members that live in the property and would want to stay there in the event you passed away.

Should I Get Life Insurance with a Mortgage?

It’s certainly worth having some sort of life insurance in place when you take out a mortgage, especially if you have dependents, a family or a job that comes with a higher level of risk – e.g. firefighter, police officer, construction worker, etc.

Nonetheless it’s not compulsory, neither is it your only option. You can contact us on 0330 433 2927 to speak to one of our expert protection advisors to find out what your options are and the potential costs.