For many of us, taking out a mortgage to buy a property is our biggest financial commitment. But what happens if you pass away before you’ve paid it off? How do you protect your family after you’re gone? Do you need life insurance for a mortgage?
Here, we explain whether life insurance is a compulsory requirement when getting a mortgage, why you should take it out, and what sort of life insurance you should consider.
Is Life Insurance compulsory for a mortgage in the UK?
No. Contrary to popular belief, you don’t need a life insurance policy to qualify for a mortgage in the UK.
However, taking out life insurance before you take on the task of repaying a mortgage can be a sensible (and responsible) decision — especially if you have a partner or dependents.
Why should you take out life insurance when getting a mortgage?
If you die without life insurance, your debt (including your mortgage) will be passed to your loved ones. If they are unable to keep up with the repayments, they might be forced to sell the property and move out — or face the possibility of having the property repossessed by the lender.
Having your life insured means that, in the event of your death, your family could clear the debt and remove the burden of mortgage repayments during an emotional and stressful time.
In short, it provides peace of mind that your family will be financially secure should the worst happen.
What type of life insurance do you need for a mortgage?
Ultimately, when you take out life insurance with your mortgage in mind, you’ll want to ensure that it pays out a lump sum that can be used to pay the remaining mortgage balance in the event of your death.
Fortunately, there’s a type of life insurance designed to do just that. It’s called “decreasing life insurance” — otherwise known as “mortgage life insurance”.
It gets its name from the fact that the payout decreases over the policy term, in much the same way that the balance of your mortgage decreases as you make repayments. That means, should you pass away during your mortgage term, your loved ones will have the right amount of money to clear the mortgage balance.
Decreasing life insurance is usually cheaper than the other option: “level term insurance”. Level term life insurance doesn’t decrease over time. Instead, it pays out the same amount at any point over the period of cover.
You might want to consider level term insurance if you have an interest-only mortgage (where you pay off the interest each month, but the capital remains untouched until the end of your mortgage term). That way, your family will have enough to clear the entire balance.
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How does life insurance affect mortgage deals?
As we mentioned above, life insurance is not compulsory to get a mortgage in the UK.
That said, mortgage lenders set their own criteria for who qualifies for a mortgage. And in some cases, this can include having life insurance in place.
Why do some mortgage providers insist on life insurance?
While most lenders are only interested in your affordability (your ability to repay a mortgage loan based on your income, expenses, and debt), some lenders will also insist that you have life insurance in place before agreeing to lend you money.
This might be because you seem like a higher-risk applicant, or because you’re buying a property as a couple.
When you get a joint mortgage with a partner, your repayments will be calculated based on two salaries instead of one.
If the worst happens, the lender will want to know that you or your partner can keep up with the repayments alone. A life insurance payout protects all parties in this situation.
Read more: Buying your first home together – what you need to know.
Note: Always take care when discussing life insurance with a mortgage lender. Chances are they’ll want to sell you a life insurance product offered by their bank or a sister organisation. You don’t need to take out life insurance with the same lender as your mortgage. You’ll often find a cheaper deal if you shop around.
Can a mortgage be declined if I don’t have life insurance?
We can’t speak for every mortgage lender out there, but it’s typically quite unusual to have a mortgage application declined solely because you don’t have life insurance.
Of course, that’s not to say that it can’t happen. Lenders can refuse a mortgage at their own discretion and for any number of reasons.
The lack of life insurance coverage on your part might sway their decision. However, most mortgage lenders will explain why your application has been declined, so you can take steps to avoid another rejection the next time you apply.
What other insurance do I need to get a mortgage?
Most lenders will insist you have buildings insurance in place before they’ll approve your mortgage.
Buildings insurance protects your property against damage that might require repairs. This type of insurance covers the structural elements of your home, such as the walls, roof, floors, fixtures, and fittings. Buildings insurance isn’t the same as Home & Contents insurance, which covers your belongings, such as furniture, TV, and appliances.
Lenders want you to have buildings insurance in place before lending you money to safeguard their investment. For example, they want to know that, if your home was damaged due to a storm or fire, you could make the necessary repairs to maintain the property’s value.
If you didn’t have buildings insurance and the property was damaged, the value could be significantly lowered. That means the lender might be unable to sell it and recoup the money they loaned you if you fell behind on your mortgage payments.
Ultimately, that’s why buildings insurance is a requirement for a mortgage, whereas life insurance is not.
Read more: Is it a legal requirement to have Home & Contents insurance?
Do I need mortgage life insurance if I have no dependents?
If you don’t have any dependents — meaning people who depend on you, your income, and your home, such as a partner or children — you might think there’s little point in taking out life insurance.
However, having a life insurance policy can cover more than just your mortgage should the worst happen. It could help your wider family pay for funeral expenses or clear other outstanding debts. This could make dealing with your estate easier.
On the other hand, if you choose not to take out life insurance and you die before the end of your mortgage term without any dependents, your mortgage lender will probably repossess and sell your house to recoup their loan.
Do I need life insurance if I don’t have a mortgage?
If you’re not currently a homeowner, you might think having life insurance isn’t as important. However, if you’re renting a property and have people who rely on you financially, it’s still worth considering.
Ask yourself, could your loved ones afford the rent and other household bills if you were no longer around?
A life insurance policy can provide peace of mind for renters and homeowners alike.
To recap: Do you need life insurance for a mortgage?
In short, no, you don’t need life insurance to get a mortgage in the UK. The only insurance you legally require before getting a mortgage is buildings insurance.
However, taking out life insurance when you apply for a mortgage is a good idea.
Should the worst happen and you die unexpectedly, your loved ones will be financially secure and able to stay in the family home without any mortgage stress or worry.
Looking for life insurance before you take out a mortgage? Our experienced life insurance team will look at your individual circumstances to make sure you get the right level of coverage to protect you and your family. Get started here.
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