Life Insurance – Is it Compulsory for a Mortgage?

People often ask, “Can you get a mortgage without life insurance?” Because UK mortgage lenders generally can’t compel borrowers to buy life insurance as a loan condition, the short answer is “yes.”

That said, many lenders and financial advisors recommend mortgage life cover. It provides valuable financial protection to your dependents in the unfortunate event of your death.

Whether you’re a first-time buyer, remortgaging, or looking to protect your family, our guide covers what you need to know about mortgage life insurance.

Do You Need Life Insurance For a Mortgage?

Life insurance on a mortgage is not compulsory in the UK for securing a home loan.

Still, Home Owners Alliance/Lifesearch research indicates 64% of UK mortgage holders have some form of mortgage protection insurance (life insurance, income protection, critical illness cover).

Homeowners choose mortgage life insurance because it provides:

• Peace of mind: Your home loan will be paid off if you pass away.
• Family financial security: It protects your partner and children from financial strain.
• Home protection: It helps ensure your loved ones can stay in the home without worrying about mortgage payments.

What Is Mortgage Life Insurance?

Mortgage life insurance is a type of life cover specifically designed to pay off your mortgage if you pass away during the policy term.

The policy period usually matches your mortgage term (e.g., 25 years). If you die within that term, the insurance company pays a lump sum that can be used to settle the mortgage debt.

It’s distinct from “buildings insurance” that insures for fire, flood, and other property damage, and is almost always mandatory with mortgages.

Different Types of Mortgage Life Cover and How They Work

Here are the main types of mortgage life cover and their defining characteristics.

Payout amounts

There are two main payout options:

Decreasing Term cover: The payout amount decreases over the policy term, matching the reducing balance of a repayment mortgage. It’s generally the most affordable cover.

Level Term cover: The payout amount remains the same throughout the term. This suits an interest-only mortgage, and if you want an extra lump sum for your family.

Premium structures

Premiums can be fixed or reviewable:

Fixed premiums: The monthly payment remains the same for the entire policy term, offering financial certainty.

Reviewable premiums: These are initially attractive because they generally start lower. However, the insurer can increase the premiums (usually every few years) based on your age, inflation, and their commercial policies.

Other considerations

Joint Life insurance policies: These cover two people/mortgage holders. The most common is Joint Life First Death, which pays out upon the death of the first person.

Add-ons: Many people choose to combine life insurance with either:

Critical Illness Cover, which pays a lump sum if you are diagnosed with a serious illness.

Income Protection Insurance, which provides a replacement income if you can’t work due to illness or injury.

Cost of Mortgage Life Insurance

The cost of life insurance mortgage protection varies based on several factors, including:

• Your age and health: Older borrowers typically pay higher monthly instalments.
• Size of your mortgage: The larger the loan, the heftier the life insurance premium.
• Length of the policy: A longer policy usually carries a higher cost.
• Smoker’s “premium”: Smokers often pay significantly more for life insurance.
• Decreasing cover vs level term: Decreasing term policies are generally more affordable than level term products.

When You Might Not Need a Mortgage Life Insurance Policy

Depending on your personal circumstances and financial arrangements, you may not need life insurance cover if:

• You have no dependents, meaning no one would struggle financially or be out of a home if you die.
• Your mortgage is covered by other assets (e.g., savings/investments, workplace benefits).
• You’re a single buyer with sufficient financial backup.

What Happens to Your Mortgage Life Insurance if You Pay Off Your Mortgage Early?

If you redeem your mortgage early, your life insurance policy continues until the end of its original term, or until you stop paying the premiums.

It’s important to remember that term life insurance policies have no cash-in value. You could pay premiums for twenty years, and there will be no lump sum payout at the end of the period.

If you pay off the mortgage, you have three options:

1. Keep the policy: The policy stays active. The payout could cover future costs for your family, even though the house is paid for.
2. Cancel the policy: You can stop paying premiums and cancel the policy. Note – there is no cash in value if you do this.
3. Convert the policy: Some policies let you convert to a different type of cover to suit your new circumstances (e.g. you can reduce the term to suit your needs).

Choosing the Right Policy for You

When choosing mortgage life insurance, consider the following:

• What am I protecting? Do you want coverage just for your mortgage balance? Or do you need a larger sum to cover debt, childcare, and funeral costs (requiring a Level Term policy)?
• Cost vs certainty? Are you happy with a lower starting premium that might rise (Reviewable)? Or do you need a fixed payment for more certain budgeting?
• Do I need added protection? Should you combine the cover with Critical Illness to protect against a health crisis? Or is Income Protection a better way to maintain a mortgage if you lose your salary?

Working through these questions will help you determine how much life insurance or what type of cover you require.

Speak to a Mortgage Protection Insurance Advisor

Life insurance mortgage coverage is one of several options for protecting your home against unfortunate life events.

Since policies and coverages vary greatly, it’s recommended to get personalised advice from a qualified advisor. Flagstone can help compare insurance options across the market to get you the best cover for your personal and family circumstances.

Contact Flagstone’s mortgage and protection advisers today for no-obligation advice tailored to your precise needs.