When you take out a mortgage, particularly as a first-time buyer, one of the questions you will be asked is whether you want to arrange life insurance. But is it a requirement, and what does it actually cover? Here is what you need to know.
Is Life Insurance a Mortgage Requirement?
Life insurance is not a legal requirement for a mortgage. Most lenders do not insist on it as a condition of lending. However, some lenders may require it in certain circumstances, such as interest-only mortgages or where affordability is tight.
While it is not mandatory, it is worth understanding what life insurance does and whether it is appropriate for your situation.
What Does Mortgage Life Insurance Cover?
Mortgage life insurance (sometimes called mortgage protection) is designed to pay off some or all of your outstanding mortgage balance if you die during the policy term. This means your family or dependants would not be left with the burden of mortgage repayments.
There are different types of cover:
Decreasing term life insurance is the most common type used alongside a repayment mortgage. The cover amount reduces over time, roughly in line with your outstanding mortgage balance. Because the cover decreases, premiums are typically lower.
Level term life insurance maintains the same cover amount throughout the policy. This can be useful if you have an interest-only mortgage (where the balance does not reduce) or if you want to provide a lump sum for your family beyond just the mortgage.
Who Should Consider It?
Life insurance alongside a mortgage is particularly worth considering if:
- You have a partner or family who depend on your income
- Your partner could not afford the mortgage payments alone
- You are buying jointly and want to protect the other person
- You have children or other dependants
If you are buying alone with no dependants, the decision is more personal. Consider who would be responsible for the debt and whether your estate could cover it.
What About Critical Illness Cover?
Critical illness cover is a separate product that pays out a lump sum if you are diagnosed with a specified serious illness during the policy term. It can be added to a life insurance policy or taken separately.
Conditions typically covered include cancer, heart attack, and stroke, among others. Each policy defines its covered conditions differently, so it is important to understand what is and is not included.
How Much Does It Cost?
Premiums depend on several factors:
- Your age at the time of application
- The amount of cover required
- The policy term
- Whether you smoke
- Your health and medical history
- The type of cover (decreasing vs level term)
As a general principle, the younger and healthier you are when you take out a policy, the lower the premiums.
When Should You Arrange It?
Ideally, you should have cover in place by the time you complete on your property purchase. Many buyers arrange protection at the same time as their mortgage application, so everything is set up together.
Getting Advice on Protection
At CGR Financial, we offer protection and insurance advice alongside our mortgage services. We can help you understand the different types of cover available and find a policy that fits your needs and budget.
Get in touch to discuss your protection options.
The information contained within was correct at the time of publication but is subject to change.