What is mortgage life insurance and is it right for me?
Find out if mortgage life insurance or standard life insurance is suited to your financial and family needs.
Key takeaways
Mortgage life insurance is a decreasing term policy, which ensures your home loan is paid off if you die within the mortgage term
The value decreases as you pay down your mortgage so if you pass away during the term, your dependents receive a sum to cover the remaining mortgage
A decreasing term life insurance policy starts from just £6.77
^ a month
What is mortgage life insurance?
Mortgage life insurance, also referred to as decreasing-term life insurance, is a type of life insurance policy that pays off the remaining balance of a mortgage if the policyholder dies.
How does mortgage life insurance work?
You purchase the policy for a set period, ideally running alongside the length of your mortgage. As you gradually pay down your home loan, the value of your insurance policy decreases correspondingly.
In the event of your passing during this term, your dependents will receive a sum that covers the remaining mortgage, ensuring the family home is secure.
Do I need mortgage life insurance?
No, life insurance isn't a legal requirement for a mortgage, but some lenders might make it a condition to protect their loan, and it's highly recommended to cover your debt if you have dependents, preventing your family from losing the home.
A recent HomeOwners Alliance survey revealed that out of 500 mortgage holders, over a third (36%) of UK mortgage holders have no life, income or critical illness cover. Almost half (46%) admitted they would struggle to pay their mortgage within six months of losing their income, with 21% facing difficulties within just two months.
What should I consider before getting mortgage life insurance?
Here are some questions to ask before you take out mortgage life insurance:
Do I only want to cover my mortgage?
If yes, go for mortgage life insurance
If no, consider level term life insurance for broader protection
Do you have other financial dependents or debts?
If you want to provide for your family beyond the mortgage, choose level term
What’s your budget?
If affordability is key, mortgage life insurance might be better due to lower premiums
How much does mortgage life insurance cost?
The average cost of a decreasing term life insurance policy is currently £24.66
What are the pros and cons of mortgage life insurance?
Similar to other types of life insurance, there are pros and cons to weigh up with mortgage life insurance, including:
Pros
Premiums are generally lower compared to other life insurance types, as the payout decreases over time
Straightforward cover focused solely on mortgage protection
Guarantees that your home will be paid off, providing financial security for your loved ones.
Fixed term aligned with your mortgage term, so you’re not paying for coverage you don’t need
Cons
The payout reduces over time, which might not leave enough for other expenses or dependents
Designed only for mortgage repayment, offering little to no flexibility for other financial needs
Unlike other life insurance policies, it doesn’t provide a lump sum for dependents or cover other debts
The decreasing payout structure doesn’t match the static balance of an interest-only mortgage
If you’ve made changes to your mortgage (e.g., extending the term or borrowing more), the policy might not provide full cover unless you update it
What’s the difference between mortgage life insurance and level term insurance?
There are several differences between mortgage life insurance and level term insurance, including:
Mortgage decreasing term life insurance | Level term life insurance | |
|---|---|---|
Purpose | Designed to cover a repayment mortgage or other decreasing debt | Provides a fixed lump sum payment for dependents |
Payout amount | Decreases over time, usually in line with the outstanding mortgage balance | Stays the same for the entire policy term |
Premium costs | Generally cheaper premiums due to the decreasing payout and reduced insurer liability over time | More expensive premiums because the payout and cover remains the same throughout the term |
Suitability | Homeowners with a repayment mortgage who only need to cover the mortgage balance | Individuals wanting to provide a fixed sum for family, debts, or other expenses |
Flexibility | Less flexible, linked closely to a decreasing debt like a mortgage | More flexible, can be used for any purpose and doesn’t depend on debt |
Payout | Matches the reducing liability over the mortgage term | Offers a consistent payout regardless of when death occurs during the term |
Mortgage life insurance vs level term - which is right for me?
Choosing between mortgage life insurance and level term life insurance depends on your financial situation, dependents, and goals. Here’s a breakdown to help you decide:
Mortgage life insurance
Best For:
Homeowners with a repayment mortgage who want a policy that pays off the outstanding balance if they pass away
Those looking for a more affordable option, as premiums are generally lower due to the decreasing payout over time.
Individuals who prioritise covering a specific debt (like a mortgage) rather than leaving a lump sum for family or other purposes.
Level term life insurance
Best for:
Those looking to provide a fixed lump sum for dependents, regardless of when death occurs during the policy term
Individuals with interest-only mortgages or no mortgage who want financial security for their family (e.g., to cover living costs, education, or other expenses)
People who prefer flexibility in how the payout can be used
Should I get mortgage life insurance if I have an interest-only mortgage?
Mortgage life insurance (decreasing-term life insurance) is often not suitable for interest-only mortgages. This is because the insurance payout reduces over time, while the amount you owe on your mortgage usually stays the same, as you're only paying the interest on the loan, not capital.
If you were to die later in the mortgage term, the payout may not be enough to clear the amount you've borrowed.
In most cases, people with interest-only mortgages are better suited to level-term life insurance, which pays a fixed lump sum if you die during the policy term. This ensures there is enough cover to repay the full mortgage amount at any point.
Can I write a mortgage life insurance policy in trust?
Yes, you can choose to write a mortgage life insurance policy in trust. This means the policy is legally held by trustees on behalf of the people you want the money to go to (the beneficiaries), rather than forming part of your estate.
Writing mortgage life insurance in trust can be helpful if you want the payout to be available quickly and used to support those who rely on you financially. However, trusts can be complex, so you may want to seek professional advice before setting one up.
What are the alternatives to decreasing term life insurance?
Here are some alternative life insurance policies to consider:
Level term life insurance
Best for:
Those looking to provide a fixed lump sum for dependents, regardless of when death occurs during the policy term
Individuals with interest-only mortgages or no mortgage who want financial security for their family (e.g., to cover living costs, education, or other expenses)
People who prefer flexibility in how the payout can be used
Joint life insurance
Works in the same way as a single life insurance policy, but it can cover two people under the same policy. It is designed mostly for married couples, long-term partner, and business partners.
Income protection
Pays a regular monthly income to the business if the employee becomes ill and is unable to work
Whole of life insurance
Also known as life assurance, whole of life insurance a type of policy that ensures a payout throughout your entire life. As long as you keep up with your premiums, your family will receive a lump sum payout once you die.
Pre-existing medical life insurance
Life insurance with pre-existing medical conditions covers you if you have a medical condition when you apply for a policy. It works similarly to standard life insurance, but the cost and coverage will depend on your medical history.
Death in service benefit
A death in service benefit is a lump sum of money paid to the beneficiary of an employee who dies while still working for the company. It's a benefit offered by some employers as part of their employee benefits package.
Compare life insurance with MoneySuperMarket
Finding the right life insurance policy is straightforward with MoneySuperMarket. By providing some basic information about yourself and your coverage needs, you can receive a list of personalised quotes that make it easier to balance cost against cover and find the policy that fits your situation best.
Using MoneySuperMarket’s life insurance calculator can simplify the process, guiding you through a few easy steps to determine the right cover for your circumstances.
Author
Rachel Ditchburn
Former Senior Commercial Manager
Rachel is a former Senior Commercial Manager at MoneySuperMarket, where she oversaw the Protection, Pet and Leisure Insurance channels. Outside of work, Rachel is a keen cook and enjoys live music,...
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Collette Shackleton
Content Writer
Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
