When you take out a mortgage, you are taking on a debt that could outlive you, and that worries a lot of people. Should you have life insurance to cover it? This guide explains the link between life insurance and your mortgage, what kind of cover suits a mortgage, and whether you actually need it.
Is life insurance required for a mortgage?
Life insurance is not a legal requirement for a mortgage, and a lender cannot force you to buy a specific policy. However, many lenders strongly recommend it, and some may ask you to consider it, because a mortgage is usually a household's largest debt. What lenders do require is buildings insurance, which protects the property itself. Life insurance is about protecting the people who would be left with the mortgage if you died.
Why people cover their mortgage
The reason mortgage life cover is so common is simple: if you died with a mortgage still owing, your family would either have to keep paying it or risk losing the home. Life insurance set up to cover the mortgage means that if you die, the policy pays off the remaining balance, so your loved ones can stay in the home without the financial strain. For many families, this is the single most important reason to have cover at all.
The right type of cover
For a repayment mortgage, where the balance falls over time, decreasing term life insurance is a natural fit, since the cover reduces in line with the shrinking debt and is cheaper as a result. For an interest-only mortgage, where the balance stays the same, level term cover is needed so the full amount is always available. Choosing the right type matters, as our guide to level versus decreasing term explains in detail.
Matching the term to your mortgage
As well as the type of cover, the length should match your mortgage. If you have 25 years left on the mortgage, a 25-year policy ensures cover lasts as long as the debt. Setting the term too short would leave a gap at the end when the mortgage is still owing, while a much longer term than needed means paying for cover beyond the debt. Aligning the two keeps the protection efficient and complete.
Mortgage life cover is not the only option
You do not have to buy a separate policy labelled mortgage life insurance. A standard life insurance policy with the right amount and term does exactly the same job, and shopping around for it can be cheaper than taking the policy a lender offers. The key is the cover itself, a suitable sum over a suitable term, rather than any particular product name, so compare widely as our guide to how much cover you need suggests.
Don't confuse it with other products
Mortgage life insurance is sometimes confused with mortgage payment protection insurance, which is different. Payment protection covers your monthly mortgage payments for a limited time if you cannot work due to illness, injury or sometimes unemployment, rather than paying off the mortgage if you die. The two protect against different risks, and some people consider both. Understanding the difference avoids buying the wrong product or assuming one does the job of the other.
Lump sum or family income
Covering the mortgage with a lump sum is the usual approach, but it is not the only way to protect your family. Some people prefer family income benefit, which pays a regular income rather than a lump sum, to help with everyday costs alongside or instead of clearing the mortgage. Which suits you depends on whether your priority is wiping out the debt or replacing income, as our guide to family income benefit explains.
Adding critical illness cover
Many people covering a mortgage also consider critical illness cover, so that the mortgage could be cleared not only if they die but also if they are diagnosed with a serious illness that stops them working. This can be added to a mortgage life policy. It costs more, but a serious illness during the mortgage term is a real risk, and being unable to work while still owing a large mortgage is exactly the situation people want to avoid.
Review when your mortgage changes
Your mortgage cover should keep pace with your mortgage. If you move home, remortgage to a larger loan, or extend the term, your existing cover may no longer match the debt, so it is worth reviewing it at those points. Equally, as you pay the mortgage down, your need for cover may fall. Keeping the policy aligned with the actual mortgage ensures it would do its job without you paying for more than you need.
Do single people with a mortgage need it?
If you are single with a mortgage and no dependants, the picture is different. There may be no one who would lose a home or inherit the debt, in which case mortgage life cover may be less necessary. But if you own jointly, have a guarantor, or want to leave the property to someone unencumbered, cover may still make sense. It is worth thinking through who, if anyone, would be affected by the mortgage if you died.
What happens if you have no cover
It is worth being clear about the risk of having no life insurance with a mortgage. If you died, the mortgage would not simply disappear; the debt would remain against the property. Your family would have to keep up the payments from whatever income and savings they had, or, if they could not, face selling the home, often at a deeply difficult time. Life cover removes that dilemma, which is why so many people regard it as essential while a mortgage is outstanding.
Joint or single cover for a couple
If you share a mortgage with a partner, you can cover it with a single joint policy or with two single policies, one each. A joint policy is usually slightly cheaper but typically pays out only once, on the first death, then ends. Two single policies cost a little more but keep the survivor covered and can each pay out, which many couples prefer. Our guide to joint versus single life insurance explains the trade-offs in detail.
In short
Life insurance is not required for a mortgage, but many people use it so their family could clear the loan and keep the home if they died. Decreasing term suits a repayment mortgage and level term an interest-only one, with the term matched to the mortgage. A standard policy does the job, often more cheaply than a lender's, and it is distinct from payment protection. Review the cover whenever your mortgage changes.
Where to get help and next steps
Read level versus decreasing term to choose the right type, work out the amount with how much life insurance you need, and consider family income benefit as an alternative. This is general information, not financial advice.