Do You Need Life Insurance For a Mortgage?

Taking out a mortgage is one of the biggest financial commitments you’ll ever make. It’s a long-term loan that can last for decades, and your financial situation may change over time.

For example, illness, job loss, or a reduction in income could affect your ability to make your mortgage repayments. To safeguard against this, many homeowners consider life insurance to ensure their mortgage is covered if the unexpected happens.

But is life insurance required to get a mortgage? This article answers common questions about mortgages and life insurance.

Is life insurance required for a mortgage?

No, life insurance is not legally required to get a mortgage. The only form of insurance you’re legally required to have when taking out a mortgage is buildings insurance.

However, some lenders may prefer borrowers to have a policy in place, as it ensures that the outstanding mortgage can be repaid if you pass away.

While it’s not compulsory, should you get life insurance? In most cases, the answer is yes, especially if you have dependents or a joint mortgage.

What type of life insurance do I need?

If you decide to take out life insurance, choosing the right type of cover is important. Here are the main options:

Mortgage Protection Insurance (Decreasing Term Life Insurance)

• Specifically designed to pay off your mortgage balance if you die.
• The payout decreases in line with your remaining mortgage debt.
• Often, it is the cheapest option for covering your mortgage.

Level-Term Life Insurance

• Pays out a fixed lump sum if you die within the policy term.
• Can be used to cover the mortgage and other expenses.
• Generally more expensive but provides extra financial security for your family.

If you want a policy that covers more than just your mortgage (e.g., children’s education, living expenses), level-term life insurance may be the better option.

The comprehensive guide to life insurance on our sister website, Online Money Advisor, provides more information about the specifics of life insurance, what it covers, and the different types available.

When do you need it?

The most common reason for needing life insurance is to ensure that whoever inherits your property in the event of your death does not inherit the mortgage with it.

Many families would be left unable to pay off the mortgage if anything were to happen to the primary breadwinner. Your loved ones could stand to lose their home and be severely set back financially.

This can be devastating for those already struggling with tragedy or just a change in circumstances.

But life insurance will make sure your loved ones are well taken care of and can pay off the mortgage if the primary provider dies or becomes critically ill.

If you’re on your deathbed, the last thing you want to be worrying about is how your spouse and children will keep the roof over their heads after all.

Should I take out life insurance or mortgage protection?

Mortgage protection insurance is a type of life insurance designed specifically to pay off the mortgage if you die while the debt is still being repaid.

Your insurance company will pay your mortgage directly to your lender, so you don’t need to worry about your family picking up the costs.

Mortgage protection, taken out as a standalone policy, is often the cheapest type of cover. If you’re looking solely for a payout to give you enough to pay off your mortgage, it may be all you need

Level-term life insurance will pay off a lump sum if you pass away within the policy’s set term. While often more expensive, it can leave your loved ones with enough to cover the mortgage and have more leftover for other living expenses.

If you want these extra benefits, general life insurance may be a better option.

How much life insurance do I need for a mortgage?

Levels of cover vary between insurance companies, and how much you can take out will also depend on your circumstances. To find the right insurance type, you’ll need to compare a few providers and review their policies.

Other considerations should be:

• How much your mortgage repayments are
• Other outstanding loans you may have
• Family costs such as childcare, education fees, and other dependents
• How dependent your loved ones on a single source of income

Your life insurance should cover all of these areas, but as it’s paid monthly, you’ll also need to consider your current outgoings to work out how much you can afford to spend on it.

Get in touch to speak with a mortgage expert who can advise you on how much cover you may need and where to find a policy that’s right for you.

Should I get life insurance if I already have a mortgage?

If you already have a mortgage, you may wonder whether you need to take out life insurance.

Most homeowners are offered life insurance by their mortgage broker when they initially go through with the buying process; however, not everyone will opt in as it’s not compulsory.

You can get life cover at any point that is right for you. If any of the following situations apply to you, it might be worth considering getting life insurance:

• You have dependents who rely on your income
• You purchased your home alone but now have a partner or family
• Your financial situation has changed since taking out the mortgage

For example, you may have lived on your own previously, but now you have a family, so it could be worth investing in the security life insurance offers.

It’s worth noting that you can get life insurance that covers your entire mortgage or just part of it in the event of your death.

Remember that one of the main factors in determining the cost of your life insurance is your age, so the longer you leave it, the more you could end up paying.

What if I don’t have a mortgage

Most people won’t take out life insurance before a mortgage unless they have specific reasons unrelated to owning property.

When you apply for a mortgage, you’ll most likely also be offered life insurance, and you can decide then whether you want it or not.

Typically, life insurance is for those who have dependents. If you don’t have a mortgage and you have no dependents, then there are few benefits to having life insurance since the benefits take effect when you die.

However, if you don’t have a mortgage but still have dependents who rely on you for other needs, such as education fees, then you may want to take out life insurance.

You need to ask yourself, “Will there be a financial impact on anyone if I die?”. If the answer is yes, then you probably have a need for life insurance.

Do I need life insurance for a buy-to-let mortgage?

When you die, your debts do not die with you. This means that whoever stands to inherit your property will inherit the mortgage with it. It’s not a simple case of whoever you’ve left the property to simply taking over the mortgage. They must apply for a buy-to-let mortgage as if they were buying it themselves.

For many reasons, this may not be possible, such as not meeting the criteria for a buy-to-let mortgage or having a poor credit history. In circumstances such as this, it may mean there’s no other choice than to sell the property.

Speak to an expert about life insurance and mortgages

Life insurance isn’t a legal requirement for a mortgage, but it’s strongly recommended for financial peace of mind. Whether you’re a first-time buyer, remortgaging, or investing in buy-to-let, having the right cover can protect your home and family.

We specialise in matching people with the right advisor for their specific needs and can put you in touch with a life insurance mortgage expert.

If you’d like to explore your options, call us on 0330 818 7026 or make an enquiry to speak to an advisor who can find the best policy for your needs.