Whether you’re in the process of applying for your first mortgage or you’re remortgaging, the chances are that you’re wondering whether or not to take out a life insurance policy.
Though there’s no legal requirement in the UK to have life insurance for a mortgage, the truth is that there are lots of reasons to do so. For example, Life Insurance can give you peace of mind that your family will be able to pay off any mortgage you have and stay in your family home, should you pass away.
Below, we’ve put together everything you need to know about life insurance and mortgages.
Despite there being no legal obligation to take out a life insurance policy for a mortgage, it’s worth noting that some lenders in the UK consider it a precondition for letting you borrow money. It’s also common for mortgage brokers to follow up during the mortgage application process and encourage you to take out an insurance policy. After all, it makes sense: having financial protection in place is sensible and benefits both the borrower and the lender.
Whether you’re applying for a mortgage on your own or through a broker, you should read the terms and conditions of the mortgage product you’re applying for to work out whether or not they want you to take out life insurance. Your mortgage provider can’t legally force you to take out a life insurance policy.
Whilst you don’t need life insurance to get a mortgage, you should still consider the benefits of taking out a policy. It can offer your family great comfort, knowing that they’ll be taken care of should you die. It could mean that your loved ones won’t be left with the responsibility and burden of paying off your mortgage – or worse, have to sell and move during a difficult time.
The amount of life insurance cover you’ll need depends on the size of your mortgage. If you have £200,000 left to pay on your mortgage, for example, then you should take out a policy to cover this amount. However, you should also think about other debts you may have, like car finance and credit cards, as well as money that might be needed to look after dependents.
As a couple, it might be worth taking out two life insurance plans. If one partner dies and the other loses their job, how would they cover the mortgage payments and bills? Life insurance and income protection insurance can give you one less thing to worry about, particularly during times of uncertainty, so weigh up the pros and cons and speak to an expert for advice.
In the UK, there are two different types of life insurance policies you might want to consider.
The first is decreasing life cover, which does what it says on the tin. It pays out less over time and is typically used to cover the balance of a repayment mortgage. For example, you might take out a £400,000 policy in your 30s to cover your mortgage costs. The policy will decrease over time until it only offers £200,000 of cover as you pay off your mortgage. There are many benefits to this type of cover – it’s cheaper as the amount covered reduces over the course of a policy, and it can protect your mortgage and home. However, it won’t work for interest-only mortgages, and there’s no pay-out if you live beyond the end of the plan.
The second option is called level term insurance, which pays out the same, fixed amount for the length of the policy. This insurance can be more pricey as it pays out a defined sum of money should you die within a fixed time period. As an example you may take out a £500,000 level term policy which you would pay a fixed monthly amount for, over a set amount of time. The monthly repayments remain the same and the payout should you die within the term, will still be £500,000. This policy is better for those on an interest-only mortgage as the lump sum will help to pay off the mortgage, though again, at the end of the policy, there’s no pay-out if you live beyond the end date.
When it comes to life insurance, many insurers offer both guaranteed (fixed) and reviewable products. A fixed product means the premium will remain the same throughout the length of the policy, whereas a reviewable product will be fixed for the first five years and reviewed. Although reviewable premiums mean you’ll pay less per month, they cost more as you age, and can become expensive (sometimes prohibitively) if you encounter a health problem.
Most insurers offer guaranteed premiums, which will be a fixed amount that your loved ones will receive should you die. However, some policies offer non-fixed premiums (also known as variable life insurance) that are linked to investments such as stocks, shares, and bonds. There are obvious pros and cons to non-fixed premiums.
Life insurance is all about assessing risk. Naturally, a healthy 25-year-old is less likely to die than a 65-year-old smoker. Taking out a policy as soon as you secure a mortgage could allow you to ‘lock in’ a reduced rate and protect your family from day one. The older you are when you take out life insurance, the more it will cost you per month, so act sooner rather than later.
When you take out a life insurance policy, you’ll need to answer a number of questions about your lifestyle. Always be upfront about your weight, overall health, and medical conditions: failing to do so could void your policy. If you suffer from health conditions, you might even be asked to attend a medical. This will help the insurer offer the right products at the right price.
Because we play by the book we want to tell you that...
1. We understand equity release isn’t for everyone, and we’ll never say it’s the right option for you, that’s why we pass you onto an Expert.
2. A lifetime mortgage is a loan secured against your property. With a lifetime mortgage there are typically no monthly repayments to make as the loan, plus roll up interest, is repaid when the plan comes to an end. Usually, that’s when you, or the last remaining applicant, either passes away or moves into long-term care.
3. With a lifetime mortgage you’ll still retain full ownership of your home.
4. Equity release will reduce the value of your estate and may affect your entitlement to means tested benefits.
5. Mortgage Advice Bureau Later Life offer lifetime mortgage products from a carefully selected panel of providers.
6. Unless you decide to go ahead, Mortgage Advice Bureau Later Life’s service is completely free of charge as their fixed advice fee of £1,295 would only be payable in completion of a plan.
7. ClearKey is an independent marketing website which only acts as an introducer to companies who offer advice on various financial plans, products and services.
8. Our partners are authorised and regulated by the Financial Conduct Authority.
9. ClearKey.co.uk are not authorised to give any advice and we are not liable for any financial advice provided by or obtained through a third party.
10. Life insurance products attract terms and conditions. Price information contained within this website are for illustration purposes only. You will receive a full policy document upon application which will set out the terms, conditions and limitations of cover provided under the plan.
11. Your home may be at risk if you do not keep up repayments. Think carefully about securing debt against your home. When consolidating existing borrowing be aware that extending the term could increase the amount repaid.