Do You Need Life Insurance for a Mortgage?

author image - crispin

By Crispin O'Toole-Bateman

on Wednesday 14 August 2019

Parents watching their children play in new home

Protecting your loved ones from losing their home is the number one reason that people in the UK consider life insurance – and it should be.

As a breadwinner to your family, keeping a roof over their heads is your greatest financial responsibility and, as such, it will also be the thing they are most hit by if you are suddenly no longer around.

Mortgage protection insurance – what is it?

There are a variety of ways to protect your mortgage, all of which come bundled under the umbrella of mortgage protection insurance, but each has its own strengths and weaknesses.

In this article we’ll look at the options and help you determine which is right for your family.

Can you get a mortgage without life insurance?

Some lenders will insist on life insurance to be in place before offering a mortgage – like your family, they are looking for reassurance that should the worst happen they will be covered.

Many of those lenders will then try to sell you their own mortgage protection insurance and it is easy for them to insinuate that only their particular life insurance is valid, but the truth is that as long as the life insurance is suitable for covering the mortgage then it will be accepted.

Do you have to have life insurance for a mortgage in the UK? There are a few lenders who don’t have mortgage protection cover as part of their policy, so by shopping around you could avoid the situation entirely, but even then we recommend getting the insurance for your family’s sake.

The many types of mortgage protection

There are many different ways of protecting your mortgage, here’s a few of your options…

Decreasing term life insurance

Sometimes called decreasing term assurance (DTA), this form of life insurance is ideal to cover a repayment mortgage.

It is expressly designed for the purpose and provides a solid level of cover without unnecessary frills.

How does it work?

Decreasing term insurance is a term life insurance policy where the sum assured (the payout amount) drops over time.

At the start of the policy, it is set to the balance of your mortgage, then a rate of decrease is set which mimics the dropping level of your mortgage balance as you make your monthly repayments. Each month the sum assured is lowered in line with the decrease in your mortgage balance.

If you die at any time during the term, it will pay out a lump sum large enough to cover the remaining balance of your mortgage, clearing it entirely. It’s even possible to set it slightly higher to provide your family with a little additional cover should you want to.

Why is it good?

DTA is one of the cheapest life insurance options available to cover a mortgage.

As the sum assured decreases each month, the risk for the insurance company lowers over time and this is reflected in the cost of the premiums. It is a full level of cover for your repayment mortgage at a very affordable rate.

What are the downsides?

DTA attempts to mimic your mortgage but isn’t actually tied to it, so discrepancies are possible.

To mitigate this, the policy typically estimates high, leaving a little spare cash if it is called upon, but it is possible that changes to your mortgage, a remortgage or a major adjustment in interest rates could force the policy out of sync.

Also, decreasing term insurance is ill-suited for interest-only buy-to-let mortgages.

We are great advocates of decreasing term insurance and believe it to be the perfect affordable product for people looking to secure their home for their family if they die. It should be remembered that DTA only covers you upon death and offers no help itself during your lifetime.

Mortgage payment protection insurance (MPPI)

Mortgage payment protection insurance is a third-party product designed to keep paying your mortgage if you find yourself unable to work. It is not a life insurance product and will not pay out on death.

How does it work?

MPPI is designed to pay your mortgage payments should you find yourself sick or otherwise unable to work.

Depending on the type of protection paid for, it could cover you for periods of unemployment due to redundancy as well as for illness or injury reasons.

Mortgage payment protection insurance is a form of income protection and is not life insurance, so if you die it will not clear your mortgage.

Why is it good?

MPPI is a relatively cheap form of income protection and will cover your mortgage payments during your lifetime if a problem occurs that prevents you from doing so.

As it covers your mortgage payments themselves, MPPI is capable of covering you for both repayment and interest-only mortgages.

What are the downsides?

As it isn’t a form of life insurance, MPPI is essentially useless to your family should you die and shouldn’t be considered as an answer alone, but only in conjunction with a life insurance policy.

There are a number of terms and conditions that form your MPPI contract and you may find that the condition that leaves you out of work is excluded.

This includes if you leave a job of your own free will (rather than being made redundant) or if you are away from work due to mental health issues.

Furthermore, MPPI has an exclusion period which may be as much as three months before it starts to pay out.

MPPI could be a trap. It’s a low level product that entices people due to its competitive monthly costs, but that ultimately there are too many exclusions and conditions to consider this type of cover ‘comprehensive’. Far better to plump for a more general income protection plan instead.

Level term insurance

A sibling product to decreasing term insurance, level term assurance (LTA) works in many similar ways with a set end date and lump sum payout should you die, however the sum assured remains level (hence the name) and doesn’t decrease over time, making it perfect as an interest-only mortgage life insurance.

How does it work?

LTA has a set sum assured and a length of term (usually set to your retirement age or the date of your youngest child’s maturity). Very simply, if you die during that time then it will pay the full sum to your beneficiaries.

Why is it good?

While not as cheap as decreasing term insurance, LTA is a very affordable product that will protect your family by paying off their mortgage and giving them a substantial additional tax-free amount to help them financially in the years to come.

What are the downsides?

LTA is not specifically designed for use covering a mortgage. It does do the job well, but for a repayment mortgage is a little too heavy-handed where a decreasing term policy would be more suitable.

In the case of an interest-only mortgage, however, LTA will repay the full amount leaving your family with a large asset.

Like DTA, level term life insurance doesn’t help you cover any mortgage payments during your lifetime.

Level term life insurance is an excellent product for many reasons, but the difference between life insurance and mortgage-specific life insurance shows here and other products may be more suitable.

Income protection

Generic income protection (IP) is a comprehensive product designed to support you by paying a substantial percentage of your income if you find yourself unable to work.

It is often used as mortgage cover.

How does it work?

Income protection provides you with a monthly sum (approximately 65% of your gross salary) each month that you are unable to work. It has a very customisable nature, meaning it can be tailored very specifically to your needs.

Often, IP is used in conjunction with any work sick pay scheme for optimal cover, and is usually bought alongside life insurance for a full package of protection.

Why is it good?

By providing you with a pseudo-salary, income protection allows you to go on living your life as usual, including paying your monthly mortgage repayments. In this way it is an excellent level of cover for your mortgage should you become ill or otherwise unable to work.

It is far more comprehensive that MPPI (its nearest rival) and can be set up exactly as you require.

What are the downsides?

Completely comprehensive income protection is very expensive – in fact, it’s the most expensive product on this list. It is possible to tailor it with longer waiting periods or other exclusions but doing so may weaken it to the point where MPPI is more suitable.

Like mortgage payment protection insurance, income protection doesn’t provide any assistance should you die.

If full mortgage and life cover is what you are after then income protection really should form part of that package, however we recognise the commitment of doing so and for many customers, other alternatives are more suitable.

Critical illness cover (CIC)

A crossover between life insurance and income protection, CIC provides you with a lump sum should you become ill and unable to return to work. This can then be used to pay your mortgage.

How does it work?

Critical illness cover is a life insurance product that pays out should you become seriously ill or injured, rather than waiting for your death.

It is typically used to help you by putting some capital in the bank that can be used to cover ongoing bills, clear debts or pay for medical treatment.

With a mortgage, CIC is unlikely to be large enough to fully wipe out the debt unless the mortgage is in its final years, however it would provide an amount of money enough to continue paying the monthly repayments for a significant time.

Why is it good?

CIC is a significant helping hand for your entire family if you become unable to work. As a tax-free lump sum it can be used as you see fit, including a large part or all of your mortgage.

What are the downsides?

As it isn’t tied to your mortgage, CIC by itself may be short on being able to pay off the debt in full and eventually the money may run out.

Like income protection, critical illness cover forms part of a complete security and financial protection package for you and your family.

Getting a large lump sum if you fall seriously ill is going to take the weight off the mortgage and allow you time to make other choices.

We recommend it as part of a life insurance package and though it isn’t directly a mortgage insurance, believe it to be of substantial help.

Do I need life insurance or do I need mortgage protection insurance? Life insurance quotes and advice with Unite Life

At Unite Life we offer help regarding life insurance and would be happy to talk to you about your life insurance and mortgage protection needs.

Why not give us a call today or fill in our contact form for more information?

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