What is mortgage life insurance?
Mortgage life insurance is a policy that ensures your family can keep up with the mortgage repayments in the event of your or your partner’s death.
It is sometimes also referred to as decreasing term life insurance, as this kind of cover will pay out a lump sum which can help your family should the worst happen. There are various types of mortgage life insurance, so read on to find out which might suit your situation best.
Why take out life insurance to cover a mortgage?
When you look at your finances, a mortgage is almost certainly the single largest financial commitment you will have each month – not counting credit cards at Christmas. If you die before you’ve repaid your mortgage, any family or dependants you leave behind will be responsible for the repayments.
You can take out life insurance to cover a mortgage so that, in the event of your death, it will pay out a sum that can be used by your dependants to settle the outstanding mortgage and avoid your home being repossessed.
It gives you peace of mind that your family won’t lose the house if you were to die.
Different types of mortgage life insurance
There are three main types of mortgage life insurance to consider. As with any insurance policy, the right cover for you will depend on your individual circumstances and the amount your family and dependants would require in the event of your death.
MoneySuperMarket data for January to April 2018, showing the average premium for decreasing term life insurance by age bracket. Correct as of April 2018.
Decreasing term insurance
As its name suggests, decreasing term life insurance for mortgage cover is a type of policy where the payout sum reduces in line with your total mortgage debt. Normally, the term of your policy will match that of your mortgage – if your mortgage term is 25 years, your insurance policy term will also be 25 years. This means your life insurance effectively covers your mortgage.
For example, if you took out a £150,000 mortgage and died in year one, the amount the insurer would pay out would be £150,000 – therefore clearing the rest of the debt. If you died 20 years into a 25-year term, for example, the amount you owed on your mortgage must have reduced. So if you still had £15,000 remaining at this point, the policy would pay out £15,000 in the event of your death.
This kind of policy is suitable for people with repayment mortgages, who repay their mortgage debt off over the term of their deal. They are not a good idea for those who have interest-only mortgages, as with this type of mortgage, you pay only the interest on the capital borrowed and not the capital itself.
Most decreasing term policies come with a Mortgage Interest Rate Guarantee (always remember to check this on the policy you choose), so if your mortgage interest rate stays below this guarantee, your policy should pay off any outstanding balance.
MoneySuperMarket data for January to April 2018, showing the average premium for level term life insurance by age bracket. Correct as of April 2018.
Level term insurance
When you take out a level term mortgage life insurance policy, the sum assured stays fixed throughout the duration of your mortgage. If you take out a policy for £150,000, for example, that's the amount the insurer will pay out regardless of when you die. You could be one year or 20 years in to your policy when you die, but the amount you get stays the same.
The benefit of level term insurance is obvious: as long as you die within the specified term, your dependants will usually receive more money than is needed to simply pay off the remainder of the mortgage. This lump sum could help them carry on as normal as possible, without dependence on your salary.
For example, it may be that your dependants receive £150,000 when the mortgage debt stands at just £15,000. This means they have a decent sum leftover for other commitments, such as living costs and bills.
It makes more sense to get level term insurance before you hit later life, because it’s much cheaper – in fact, if you were to get level term mortgage insurance when you are 31 years old, it would cost on average around £9 per month. But if you were to wait until you were 46, it would jump to around £35 per month, and because the payments are level – you will pay that amount for the rest of the term.
It’s worth noting that because the sum doesn't decrease over time, monthly premiums are higher than for decreasing mortgage life insurance.
MoneySuperMarket data for January to April 2018, showing the average price of premiums for people who smoked within the last 12 months. Correct as of April 2018.
Whole-of-life insurance
A third option, but not one normally associated with mortgages, is something known as a whole-of-life insurance policy. This policy pays out whenever you die, so instead of a fixed term policy – which typically last for 25 or 30 years – cover is continually provided. This means that your family will get a lump sum payout whether you have a mortgage or not.
Because there is no set term and the cover could potentially span several decades, monthly premiums tend to be considerably higher than with fixed term policies. Your premiums are also linked to investments, so if any investment growth is lower than expected, your premiums can increase substantially over time.
Critical illness cover
Critical illness cover is offered as an additional extra to mortgage life insurance and level term life insurance policies – you may already have cover in place but this can be added to your policy at any time.
It’s designed to pay out if you are suffering with a serious condition or critical illness – such as cancer, a stroke or heart attack – which affects your ability to work. Coverage will vary depending on the insurer you choose, so check the terms and conditions carefully.
However, if you take out a combined critical illness and life insurance policy, that policy will only pay out once – you wouldn't receive a sum upon diagnosis of serious illness and then again should you die during the term of the policy's coverage.
Critical illness cover is quite expensive, because you are more likely to claim on the policy during the term, therefore you should expect to double your monthly premiums if you have the additional cover. For example, if you are in the 36 to 45 age group you will pay on average £15 a month for a level term policy, but if you add critical illness cover, you would pay £36 per month.
Getting the best mortgage life insurance quotes
Ultimately, the amount you pay for your mortgage life insurance every month will be defined by a number of factors. These include the size of the cover you need, the length of time you want the policy to run for, and any additional extras – such as critical illness cover.
Your age and health and occupation will influence the price of your mortgage life insurance quotes. If you’re a heavy smoker or have suffered with a serious health condition in the past, your quote is likely to be higher than a non-smoker or an individual with better health. And if you are in construction or commercial fishing, then your life insurance policy will be much more expensive than an accountants’.
When you run a mortgage life insurance comparison with MoneySuperMarket, you’ll be able to see a number of options you can review. But remember that cheapest isn't always best – make sure your mortgage life insurance comparison includes factors such as customer reviews and the level of cover offered.