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Understanding mortgage life insurance

If you want to leave your loved ones financial protection for your home, even if you’re not there to help pay the mortgage, you may want to take out mortgage life insurance.

Our guide helps explain the essentials of mortgage life insurance, so you can choose the right cover for you and your family.

Young couple in kitchen both smiling while woman holds dangling key out in front of man

What is mortgage life insurance?

Mortgage life insurance, or mortgage protection insurance, is a type of insurance specifically for homeowners. It can help provide financial security and peace of mind for your loved ones if you pass away during the term of your mortgage.

When you buy a house and take out a mortgage, you can also choose to take out mortgage life insurance. If you die while the policy is still in place, the insurer will pay out a lump sum directly to your mortgage lender. This will cover your outstanding mortgage. That means your loved ones won’t have to worry about making mortgage payments and can keep the family home, instead of selling it off to settle the debt.

What are the different types of life cover?

There are three types of cover available: decreasing term cover, level term cover and increasing term cover.

Decreasing life insurance

Decreasing life insurance is designed to help pay off reducing debts, such as a repayment mortgage, and is set up when you buy a home. With this type of policy, the amount of cover reduces in line with your mortgage. Your monthly contributions stay the same, but you might pay less overall compared to other types of cover.

Level life insurance

Level life insurance pays out a fixed amount throughout the policy term. It's a good option if you have an interest-only mortgage. It’s usually more expensive than decreasing life insurance and doesn’t go up with inflation.

Increasing life insurance

Increasing life insurance pays out more over time and is designed to keep up with inflation. Providers can do this by adjusting the policy payout, otherwise known as index-linking, or through fixed periodic rises. These increases could affect the cost of your premiums, but you can choose to accept or decline them. Premiums are typically higher for this type of life cover, but the final payout could benefit your loved ones in many ways.

The right life insurance for you will depend on what you need cover for, how much you need and over what period. It’s a good idea to compare it with other kinds of life insurance and see what best fits your needs.

If you believe you need life insurance, then consider a life cover policy from the Post Office.

You choose to pay a fixed monthly amount

You’ll be offered either guaranteed or reviewable premiums, depending on which life insurance policy you choose.

  • Reviewable premiums: Insurers will periodically assess and adjust your premiums based on risk and economic factors, such as interest rates or advances in medical treatment. At first, these policies might cost less, but you could end up paying more in the long run. But if you’re planning to take out a long-term policy with a high value payout, then reviewable premiums can help with the rising cost of living. Bear in mind that your age and health are only considered when you take out your policy. So, while payouts and premiums may be higher, they’ll still be lower than if you need more cover when you’re older and have any health concerns
  • Guaranteed premiums: The amount you pay for your cover will be fixed until the end of your policy. If you’re on a tight budget, then choosing a policy with guaranteed premiums could help you stay on top of your monthly expenses

The healthier you are, the less you pay

Your lifestyle, age and health will impact your monthly premiums. Making healthier lifestyle choices, such as quitting smoking or doing more exercise, could have a positive impact on your mortgage life cover premiums.

Of course, you could still develop a critical illness even if you lead a healthy lifestyle. Adding critical illness cover to your life insurance policy could help ease financial stress for you and your family. It could also allow you to focus on getting better. Critical illness insurance can cover things like cancer, a heart attack or stroke.

Joint or single insurance?

If you pay for the mortgage with your partner, you could take out joint mortgage insurance. A joint policy pays out when the first policyholder passes away. You might find that a joint policy is cheaper than having a single policy each. But it’s important to consider what might happen if you and your partner were to separate while on a joint policy. If you then have to take out a single policy when you’re older, your premiums might be higher.

Or, you could take out two single policies. This means you’ll both be covered, even if you break up. And unlike a joint policy, two single policies will pay out when each policyholder passes away.

Inheritance tax

If you die during the term of your mortgage life cover policy, the payout could be part of your estate and make it subject to inheritance tax. You could write the policy into trust, which means the insurance will pay directly to your named beneficiaries. In other words, it won’t be considered part of your estate.

Need more help? Talk to an expert

  • It’s important to take professional advice before writing the policy into trust. It’s often very difficult to change or cancel a trust once it’s been created, so understanding the implications before making a commitment is crucial
  • If you want to place your insurance policy in trust, try to choose a policy that won’t charge you an extra fee
  • Find expert financial advice on Unbiased where you can contact professionals such as independent financial advisors (IFAs), solicitors and more
  • Some Citizens Advice Bureaus also have volunteer IFAs as part of the Moneyplan scheme, so check if your local bureau is taking part

Find the right life insurance for you and your family

Our life cover products

  • Life Insurance

    Choose between level, decreasing or increasing term insurance, each designed to offer you peace of mind based on your circumstances.

  • Over 50s life cover

    If you're aged between 50 and 80, we could help you leave a cash sum for your family or towards your funeral costs.