Buying a property in the UK is likely to be the biggest purchase you’ll ever make, with average property prices currently at £254,624. Purchasing a home can be a daunting process, and it can be hard to keep up with everything you need to do.
One of the main points of confusion is whether you need life insurance to obtain a mortgage. Here, we provide an overview of everything you need to know about getting life insurance to cover your mortgage debt and why it can benefit you and your loved ones.
There’s no specific law in the UK that makes having life insurance compulsory to get a mortgage. However, some benefits should make you consider doing so anyway.
Although not compulsory, some mortgage providers will need you to have life insurance as one of the conditions to approve your mortgage application.
If you were to pass away before paying your mortgage, a life insurance policy would payout a sum to ensure that your loved ones are financially protected. This would be one less problem to deal with during a difficult time.
Generally, a life insurance policy can cover costs such as:
If you’re purchasing a home, it’s likely that you have started or are planning to start a family that will be financially dependent on you. So, it’s always best to obtain some insurance protection in case you pass away.
Getting life insurance when getting a mortgage is particularly important if you have poor health, are at an advanced age, partake in dangerous hobbies regularly, have a hazardous job, or have children financially dependent on you.
Note that you can opt for your life insurance policy to cover living costs in addition to your mortgage. This adds an extra layer of security for your family in the worst-case scenario. If you’d like to know more about getting life insurance for parents, take a look at our overview that helps guide you through the process.
We compare plans from the leading life insurance providers
Generally speaking, there are two types of life insurance – term life and whole of life.
In a whole of life policy, you are covered until you die. This type of policy is usually more expensive since there is a guaranteed payout. It’s a good option if you’re looking to cover costs such as inheritance tax or funeral expenses.
However, it’s not the most cost-effective policy out of the two if you’re looking to cover your mortgage.
A term life policy provides coverage for a predetermined period. As a result, this is a fantastic option if you’re looking for coverage whilst making mortgage payments or whilst your children are still financially dependent on you.
To settle on a term period, you work out how long it will take to pay your mortgage or when your children are likely to be financially dependent. Term life policies are also split into two different groups – level term and decreasing term.
A level term policy offers you a fixed-sum payout regardless of when you pass away during the predetermined period. This policy is helpful if you want the insurance to cover living costs, loss of income, and other debt payments in addition to your mortgage.
On the other hand, a decreasing term policy sees the value of the payout and monthly payments decrease throughout the term period. As a result, this policy is usually the more popular option when taking out a mortgage. It ensures that you are always covered but only paying for the amount of coverage you need.
The cost of life insurance to cover your mortgage will depend on various factors. The insurance provider will consider the total value to be assured and the age, health, medical history, smoking status, and occupational risk of the applicant.
The UK’s average first-time buyer mortgage size stood at £198,779 in 2020. Considering that value and a non-smoking buyer aged 35, a decreasing life insurance policy over 25 years will cost you around £8 per month.
This figure does not consider whether you want the coverage to include living costs, which is helpful if you have children dependent on you. The older you are, the higher the premium will be. The same goes for any health conditions or bad lifestyle habits.
Purchasing life insurance for your mortgage can be a daunting task. There’s a lot of options on the market, and it can feel overwhelming. Here are some tips that should help you in the process:
If you’re looking to purchase life insurance for your mortgage, get in touch with an insurance provider. They’ll be able to talk you through your options in detail and help you decide which policy is best for you.