You’re not legally obliged to have life insurance for a mortgage, but some lenders may consider it a precondition for letting you borrow money to buy a home.
For many homeowners, having financial protection in place makes sense. If you own a property, a mortgage is likely to be the biggest debt you leave behind should the worst happen, so having a policy in place can help give you peace of mind.
With the average house price in the UK currently around £238,000*, a lot of homeowners will have a mortgage to pay, so it’s understandable that people want to spend any spare income wisely.
If you have children, a partner, or other dependents living with you who rely on you financially, taking out mortgage life insurance could be considered important expenditure.
Buying a Home with a Partner
Life insurance is important to consider when buying a house as a couple. When buying with your partner, your mortgage repayments could be calculated based on two salaries. If you or your partner died while your mortgage loan was still outstanding, would one of you alone be able to keep up the regular mortgage repayments?
Life insurance can help protect the family home by paying out a cash sum, which can be put towards the remaining mortgage balance if you die during the length of the policy. Your loved ones can use the pay out to help clear the outstanding mortgage debt, meaning they can continue living in your family home without worrying about the mortgage.
Life Insurance as a Landlord
If you’re buying a home as an investor, or you already own a home and you’re looking to rent it out, you may still need life insurance. This way, you can help cover the remaining balance in the unfortunate event you pass away.
This can help ensure continuance of any rental income for your beneficiaries as it reduces the need to sell the property to clear the mortgage. You might want to increase your life insurance cover to account for the higher mortgage liability should you refinance your investment property or portfolio.
Do I Need Life Insurance if I Don’t Have a Mortgage?
Life insurance is not only relevant to homeowners. While it’s true that renters are less likely to take out life insurance, that doesn’t mean you don’t need life insurance if you don’t have a mortgage.
If you’re a tenant, think about the financial impact of the loss of your income if you were no longer around. If you live with your family, could your loved ones afford the rent in your absence? What about other costs like household bills or childcare costs if you have a family. In essence, life insurance is always a good idea if other people rely on you financially, it is not just for those with a mortgage.
There are two main types of life insurance for a mortgage:
- Level term life insurance - this could pay out a fixed lump sum if you die during the length of the policy, and help your dependents to pay the mortgage (interest only) or help maintain their lifestyle and everyday living expenses.
- Decreasing life insurance - this is designed to help protect a repayment mortgage so the amount of cover reduces roughly in line with the way a repayment mortgage decreases.
If you do take out life insurance or decreasing life insurance you can add critical illness cover to your policy at an extra cost.
It could pay out a cash sum if you’re diagnosed with, or undergo a medical procedure for one of the specified critical illness covered during the length of your policy, and you survive a specified term from diagnosis (usually 14 or 28 days depending upon the provider).
A home is so much more than an asset, and whatever type of life insurance you choose, paying a small monthly premium can help your family carry on living there if you are no longer around.
The right policy for you depends on your individual circumstances, speak to a member of the Nockolds Wealth team to find out more.
- This article is for your general information only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.
- No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.
- Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future.
- Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the specific circumstances of the individual. All figures relate to the current tax year unless otherwise stated.
- These policies are not savings or investment products and have no cash-in value at any time.
- If you stop paying premiums at any time during the policy term the cover will cease.
* (June 2020 source: https://landregistry.data.gov.uk/app/ukhpi