Understanding mortgage life insurance

What is mortgage life insurance?

Mortgage life insurance, or mortgage protection insurance, is a type of insurance specifically for homeowners.  It’s sometimes called decreasing term life insurance as it’s designed to track the reducing balance on 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 the remaining balance on your 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 or struggling to keep up with mortgage payments without your income. 

The right life insurance for you will depend on your personal circumstances. 

Do you need life insurance for a mortgage? 

You don’t legally need life insurance for a mortgage. But some mortgage providers might ask that you take out a policy. You can do this through your mortgage provider, an independent financial advisor, your bank, if available, or direct from an insurer.

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.

Joint or single insurance?

If you pay for the mortgage with your partner, you could take out joint mortgage life 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 individually, even if your circumstances change. Unlike a joint policy, where the payout only occurs once (on the first death), two single policies would pay out separately when each policyholder passes away.

Read more on family life insurance

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 with inheritance tax? 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