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Mortgage life insurance review

Learn more about mortgage life insurance – how does it work and what’s it for?

A photo of Dom Limberg, the author

By Dom Limberg

Published on: 27 May 2021

8 min read

Mortgage Life Insurance Review

One of the most common types of life insurance policies that people buy in the UK is mortgage life insurance. 

Mortgage facts UK 

As a nation, we are heavily weighted towards home ownership with around 65% of the UK adult population being home owners. This is higher than many other European countries that have just over 50% of the population who are home owners. 

In 2021 according to money.co.uk the average mortgage in the UK was £193,000 and an average monthly repayment of £753. The average house price in the UK in June 2022 was £286,000 which had increased by £20,000 from June 2021. 

According to recent research by moneymarketing.co.uk, there are only 65% of people that don’t have life insurance. The same survey suggests that 6 in 10 households agreed that life cover would be beneficial for their families. 

What is mortgage life insurance? 

Mortgage life insurance is also known as decreasing term life assurance which is the industry terminology for this type of cover (your amount of cover decreases over time, as you repay your mortgage balance). Certain mortgage providers prefer you to have life insurance in place when applying for a mortgage, but generally it isn’t a requirement.

You should be able to take out a mortgage life insurance policy that is specifically designed to pay out if you die from any cause (except suicide in the first 12 months usually). When you buy mortgage life insurance, you should make sure that it is a sufficient level of life insurance to cover all or a proportion of your mortgage debt. 

Some of the things that you should know when buying mortgage life insurance: 

Your life insurance advisor will then be able to provide you with a quote for mortgage life insurance based on exactly what you need. 

Most insurers will offer mortgage life insurance as a standard policy and this can include critical illness insurance or can be stand alone. You should also get terminal illness benefit as part of your cover, which pays out if you are diagnosed with a terminal illness with less than 12 months to live. 

Note: A mortgage life insurance policy will then track the amount of balance you have outstanding on your mortgage over its remaining term. This type of cover is specifically designed to protect a capital and repayment mortgage and not for interest only mortgages. 

How does mortgage life insurance work? 

When you buy a mortgage life insurance policy, any debts secured against your family home (e.g. mortgage or secured loans) should be covered. This means that if you die or if you’re diagnosed with a terminal illness, then your home will be protected for your family. 

Here are several simple steps to explain how mortgage life insurance works for most people: 

  1. Apply for mortgage life insurance 
  2. Buy a mortgage life insurance policy 
  3. Pay off some of your mortgage before you die 
  4. If you were to die before your mortgage is repaid 
  5. Your family submits a claim 
  6. Your remaining mortgage is repaid by your life insurance provider 
  7. The family home is now debt free 
  8. No more monthly payments to be made on your property 

This is a simple example but it should hopefully give you some basic understanding of how mortgage life insurance works. This means that you’ll at least understand if you need mortgage life insurance or what you need to think about. 

Some other important points about mortgage life insurance: 

  • Mortgage life insurance is not linked to a mortgage or any debt so there is no legal connection between the cover and the debt. 
  • Remortgaging means that you should review your mortgage life insurance policy to make sure that it is still appropriate. If you change your mortgage term or mortgage amount then you should consider renewing your mortgage life insurance. 
  • Cancelling or changing your mortgage life insurance has no impact on your mortgage and you are well within your rights to do this. 

Note: When you take out mortgage life insurance, you don’t need to notify your mortgage lender and it is not a requirement to have mortgage life insurance. If you have a partner or dependents then you should definitely consider taking out cover to protect your mortgage. 

Does mortgage life insurance always track my mortgage balance? 

There is no guarantee that your mortgage life insurance policy will always track your mortgage all the way through. 

Two of the main possibilities are: 

  • Surplus amount is the most common scenario where you will have some money remaining when your mortgage has been repaid. You can set your interest rate when you take out mortgage life insurance and make sure that it is always above your mortgage rate. This extra money can be used to support your loved ones with other expenses and living costs.
  • Shortfall can happen where your mortgage interest rate increases to higher than your life insurance interest rate. Also, if you remortgage and don’t review your mortgage life insurance then you might have a shortfall. 

Is family life insurance any good for a mortgage? 

The simple answer is, yes, you can definitely use family life insurance (level term assurance) to protect a mortgage. 

There are in fact occasions where a level term life insurance policy is actually better for a mortgage. If your mortgage is on an interest only basis then you should have level term cover or family life insurance. 

Ultimately, if you have a repayment mortgage and you take out family life insurance then your mortgage should always be repaid, plus an extra amount for your family. As your mortgage balance reduces, the amount of life insurance for your family will increase. 

You should note that if you die in the first few years of having family life insurance then your family won’t get much extra. As your mortgage balance reduces over time with a repayment mortgage, the amount of additional cover will continue to increase. 

How much does mortgage life insurance cost? 

Your mortgage life insurance premiums are likely to be different to anyone else in your family or your friends. Premiums will be unique to you and work in a similar way to other common types of, such as car insurance or home insurance. 

Premiums for mortgage life insurance are medically underwritten when you take out cover and will be based on your circumstances. 

Mortgage life insurance premiums are based on: 

If you take out mortgage life insurance when you are younger then your premiums will always be lower than someone in later life. If your policy is underwritten fully and terms are offered then you should have no exclusions to your cover. 

Cost of £200,000 mortgage life insurance non-smoker 

Here are several examples of the cost of a £200,000 mortgage life insurance policy for a non-smoker. We’ve chosen £200,000 over 25 years for this example because this is the current average mortgage amount in the UK. 

Age (at start of policy) Mortgage life insurance Mortgage life insurance Plus Critical Illness 
25 £4.84 £22.49 
30 £5.61 £30.66 
35 £6.92 £42.63 
40 £9.78 £61.78 
45 £14.51 £93.98 

Cost of £200,000 mortgage life insurance smoker 

Below are similar examples to the premiums quoted in the table above but this time they are for smokers. 

Age (at start of policy) Mortgage life insurance Mortgage life insurance Plus Critical Illness 
25 £6.69 £26.63 
30 £8.34 £40.79 
35 £12.08 £63.26 
40 £19.79  £99.48 
45 £33.10 £161.71 

What is best mortgage life insurance or family life insurance? 

The two most popular types of life insurance are mortgage life insurance (decreasing term assurance) and family life insurance (level term assurance). 

Here’s a few quick points to think about before buying life insurance to see which one might work best for you. You can buy either type of life insurance from most insurers and most insurance specialists, so it’s worth understanding which is best. 

Mortgage life insurance 

Pros 

  • Cheaper premiums than family life insurance 
  • Designed specifically for a mortgage 
  • Pays out a lump sum 
  • Can be flexible 
  • Usually easy to buy 
  • Available through most insurance companies 

Cons 

Family life insurance 

Pros 

  • Cover amount never reduces 
  • Can be more cost effective and mortgage life insurance 
  • Provides your family with a lump sum 
  • Can be flexible 
  • Available through almost all insurers, including specialist insurers 
  • Cover can increase with inflation 

Cons 

  • Premiums will be higher than mortgage life insurance 
  • Will usually be less family protection earlier in the term 
  • Medically underwritten (anyone with pre-existing medical conditions) 
  • Might not offer the flexibility that you want 

Things to look out for when buying mortgage life insurance 

There are some questions that you should be asking yourself and a few things that you should think about when you’re buying mortgage life insurance. 

Here are just a few things that we think you should be considering: 

  1. Where to buy mortgage life insurance – there are literally hundreds of life insurance companies, mortgage advisors, insurance specialists and insurance brokers. It’s important to make sure that anyone that you speak to is highly recommended and that they have the right insurers on their panel. 
  2. Who are you buying mortgage life insurance for – if you have children or other dependents (such as carers), then you should think about what happens to them if you die and how you would like them to be looked after. 
  3. What if you change your mortgage – if in the future you change your mortgage or buy a new property then it is always worth reviewing your mortgage life insurance and other protection. 
  4. Be honest about your health and lifestyle – you’ll be asked for details about any health or lifestyle issues and you need to be open and honest about this or you may invalidate your policy. 
  5. Consider all of the options carefully – if you’re concerned about things like critical illnesses or what to do if you’re unable to work, then you should think about all of the options available for this. 

How to buy mortgage life insurance 

There are lots of different options when it comes to buying mortgage life insurance and the best options for you might be different to someone else. 

We suggest that you speak to an mortgage life insurance expert that has access to a large panel of insurers or who is whole of market. This is especially important for people that have medical issues or who need advice to help them. 

Some of the main options for buying mortgage life insurance are: 

  1. Speak to a mortgage life insurance expert 
  2. Get mortgage life insurance online 
  3. Apply for mortgage life insurance with your bank 
  4. Get mortgage life insurance direct from an insurance provider 
  5. Speak to a mortgage advisor or IFA 

Resources

Landlord TODAY – More than 40% of mortgage holders do not have life insurance

Finder.com – Life insurance statistics

Statista – Life insurance industry in the UK: Statistics & Facts

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