Do you need life insurance for a mortgage?

Is life insurance compulsory or can you get a mortgage without a policy? Here's all you need to know...

Family stood outside new home with estate agent

April 9, 2021

Buying a house is always an incredibly exciting, albeit remarkably expensive experience. Not only do you have to factor in the cost of actually paying for the house and putting down a deposit on the house, but you will also have to account for mortgage payments and payments for various types of insurance as well.

Having a mortgage is undoubtedly one of the longest on-going payments that you’ll be accountable for during your lifetime, but what happens if you can no longer pay for it, or if you pass away?

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In our guide to mortgage and life insurance, we’ve covered everything you need to do about how the two are interlinked, plus what is mortgage protection insurance, what you need to know about mortgage payment protection and whether you can get a mortgage without life insurance.

What happens to my mortgage if I die?

If you still have outstanding payments to be made on your mortgage when you pass away, then there are several options that can be done.

Firstly, your debt (in this case, your mortgage) is passed on to the beneficiaries of your will (provided you have made one), which means that the executor of your estate will likely use any assets you have to pay off your mortgage.

Alternatively, your successors may decide to transfer the mortgage payments over to themselves until they decide what to do with your estate and whether they want to sell your house or not.

Your loved ones should also be able to pay off the remainder of your mortgage when you die if you had a policy in place called mortgage life insurance before passing away (more on that below).

Whichever way you choose, it’s imperative that your mortgage is still being paid for even when you die.

Difference between mortgage protection and life insurance

Also sometimes referred to as decreasing-term life insurance, mortgage life insurance can be used to clear the outstanding debt of your mortgage if you still have outstanding payments left on your mortgage when you die (as per your policy terms).

The mortgage life insurance policy is usually set to cover the same value as your mortgage and the level of cover decreases (so do your premiums) appropriately as your mortgage debt is paid off over time.

In the event that you pass away during the term of your mortgage, your successors can use your mortgage life insurance policy to pay off the rest of the mortgage so that the house is secure (make sure this is in your will).

Level-term life insurance is a policy where an insurer pays out a fixed lump sum to your dependants in the event of your death during the policy's pre-agreed term - if you pass away after the term, your loved ones will not receive a payout, so you may want to consider whole of life insurance instead, or you can get over 50s cover later on.

They can then use this money to pay for things like your mortgage if you don’t have a specific mortgage life insurance policy in place.

What insurance do I need for a mortgage?

While there are several types of insurance policies that can work together with a mortgage, there’s actually only one type of insurance that’s a compulsory requirement when you have a mortgage (with most lenders) and that’s buildings insurance.

Buildings insurance covers the cost of damages to your home as a result of a fire or flood, for example. It only covers the cost of repairs to the structural damage of your home, such as the roof, walls, floors, fixtures and fittings. It doesn’t cover the cost of the contents of your home such as your physical belongings; you would need a specific contents insurance policy in order to be covered for damage to your possessions inside your home.

While the following types of insurance aren’t legally required for a mortgage, they might be worth considering if you want to ensure that your dependants can pay off your mortgage in the event that you pass away or if you’re taken seriously ill.

Life insurance

There are different types of life cover policies that you can buy, depending on your needs:

  • Whole of life insurance: this covers you for your entire life, so it will payout no matter when you die (there is no pre-agreed term) and it can help your family pay off your mortgage, cover your funeral costs and much more, depending on the payout.
  • Level cover: the payout and premiums remain the same throughout the duration of the policy.
  • Decreasing cover: the premiums are usually lower than those with level cover, but the payout decreases each month in line with you paying off your mortgage.
  • Increasing cover: the pay-out and premiums increase with the rate of inflation each year.
  • Over 50s insurance: this policy is similar to whole of life but is designed for people who are aged over 50. There is no medical examination required, meaning you are guaranteed to be accepted despite any medical conditions, but it can work out more expensive, particularly if you smoke.

If you're not sure what type of insurance is best for you, we highly recommend speaking to a life insurance broker who can offer professional advice in line with your budget and needs.

Critical illness cover

Critical illness cover is a type of insurance that you might want to consider with your mortgage as it will pay out a lump sum of money in the event that you’re diagnosed with a serious, often life-threatening disease or illness such as cancer or if you suffer from a stroke. It can be added to your standard insurance policy.

If you decide to purchase critical illness cover, bear in mind that different policies cover specifies illnesses - so make sure that you know what you are and are not covered for before purchasing a policy.

For more information about life insurance and to get a quote, visit our life insurance page.

What happens to life insurance when a mortgage is paid?

As the pay-out for decreasing-term life insurance decreases over the course of your mortgage period, as you pay off your mortgage, if it is fully paid off by the time you die, then there is no need for the mortgage life insurance anymore as everything is covered.

However, even if your mortgage is fully paid off and you have a life insurance policy in place, your beneficiaries will still receive a pay-out in the event of your death, they just won’t have to use it to pay off your mortgage, so it's worth keeping the policy in place.

Life insurance for a mortgage - is it compulsory?

Having a life insurance policy in place when taking out a mortgage isn’t necessarily compulsory and isn’t classed as a legal requirement.

The only type of insurance that is a compulsory requirement when getting a mortgage is buildings insurance. A lot of reputable mortgage lenders will only accept your application on the basis that you purchase this type of policy, as it reassures them that the cost of rebuilding the property will be covered should the worst happen to your home (and they won't be out of pocket).

However, while it’s not compulsory to have life insurance for a mortgage, it can be a very good idea to have a financial backup plan in case you die unexpectedly and your mortgage isn’t paid off.

How much is mortgage insurance?

The cost of mortgage insurance varies between different insurance providers, the level of cover you want to take out and how much your home (and therefore your mortgage) is worth.

It’s always worth shopping around in order to compare prices amongst different mortgage insurance providers in order to find the best deal possible. Remember to check all the different terms and conditions of your policy, in order to see if it’s the right policy for you.

Remember, if you want specialist advice, speak to a life insurance broker as they'll be able to find the best policy suited to you and your needs, as well as the best price on the market at the time of application.

Find out more about the following insurance products below:

We also have the following guides to help with your research: