Owning a home is a significant milestone in one’s life, but it also comes with a host of responsibilities and financial commitments.
One of the most frequent questions that potential buyers ask is, “Do mortgages automatically come with life insurance?“
This article aims to shed light on this important issue, providing a comprehensive guide to understanding whether life insurance is a standard feature of mortgages.
We’ll explore the types of coverage available, discuss whether such insurance is optional or mandatory, look at the cost implications and optional extras.
The Basics of Mortgages and Life Insurance
Before going straight into the specifics, it’s helpful to understand what mortgages and life insurance are at a basic level.
A mortgage is a type of loan specifically designed to purchase property.
In a mortgage agreement, the buyer borrows money from a lender (usually a bank or a building society) to buy a home or property investment. The borrower agrees to repay the loan, plus interest, over a set period, typically 25 to 30 years.
Life insurance, on the other hand, is a policy that pays out a lump sum to your beneficiaries upon your death.
The primary purpose is to provide financial security for your loved ones, helping them cover expenses like funeral costs, debts, and, relevant to this discussion, mortgage payments.
A common misconception is that these two financial products are automatically linked—that taking out a mortgage also means you’re covered by life insurance.
However, this is not the case.
Standard Mortgage Terms
When you secure a mortgage in the UK, the primary focus is on the loan itself—the amount you’re borrowing, the interest rate, and the repayment schedule.
Life insurance is not included as a standard feature in mortgage agreements.
While some lenders may offer it as an optional add-on or recommend that you take out a policy, it’s not a mandatory requirement.
It’s worth noting that some mortgage providers may have partnerships with insurance companies, offering bundled packages that include life insurance. However, these are optional and will come at an additional cost.
Additionally, the terms and conditions of such bundled packages can vary, so it’s crucial to read the fine print and understand what you’re signing up for.
“Do I get life insurance with my mortgage?” – No, not automatically.
In summary, life insurance is not included when you take out a mortgage. It’s a separate financial product, from a separate insurance provider.
Types of policy
When it comes to life insurance that can cover your mortgage, there are several options to consider:
Level Term Insurance
This is the most straightforward type of life insurance. You choose the amount you want to be insured for and the period for which you want coverage. If you die within this term, the policy pays out a lump sum that can be used to repay the mortgage.
Mortgage Life Insurance
Specifically designed to cover your repayment mortgage, this policy’s payout decreases over time, in line with your reducing mortgage balance. It ensures that if you die before the mortgage is fully paid off, the remaining balance will be covered.
Family Income Benefit
Family Income Benefit policies are set up over a fixed term, much like a level term policy. But the death benefit is not a lump sum, it is a fixed monthly amount. This is paid from the date of death until the end of the policy duration.
Critical Illness Cover
While not a life insurance policy per se, critical illness cover can be added to a life insurance policy to provide a lump sum payout if you’re diagnosed with a specified critical illness, such as cancer, heart attack or stroke.
Whole Life Assurance
Unlike term life insurance, whole life assurance provides coverage for your entire lifetime. While it’s more expensive, it guarantees a payout upon your death, which can be used to cover the mortgage and other expenses.
What are the different mortgage repayment methods?
Although repayment mortgages are the most popular, there are actually three ways that a mortgage can be setup.
You need to have made your mind up before you apply for a new mortgage as the repayment method forms part of the application form. Also, not all lenders offer all three options.
Do you have to take out life insurance?
One of the key questions many homeowners and potential buyers have is whether life insurance is optional or mandatory when taking out a mortgage.
The simple answer is that it’s completely optional.
Lenders cannot make you have life insurance as a condition for granting a mortgage.
However, in most situations it is a sensible idea to protect the mortgage against one of the borrowers dying during the mortgage term.
What happens to your mortgage if you die without life insurance?
How to apply
You should apply for life cover as soon as you know what mortgage you need.
This means that you can apply for a policy that has the correct sum assured (death benefit) and term.
Much like a mortgage, life policies can take a little while to setup. Depending on your personal situation, the insurer may need to write to your GP, or ask you some additional questions.
When should cover start from?
Don’t worry that the policy will start too soon. You will be able to let the insurance company know what date you need cover from.
When buying a house, you should start your life insurance, and buildings insurance from the date you exchange contracts. As at that point you are legally obliged to complete the purchase.
Policy options
Before you decide to apply for life insurance cover, there are a number of options and choices to be aware of.
To fully understand these, and determine whether they are right for you, you should speak with an independent financial adviser.
Sum assured: The amount of death cover needed
Policy term: How many years the policy lasts for
Level or decreasing cover: May depend on your budget
Critical illness: Extra cover for heart attacks, cancer etc.
Waiver of premium: In case you fall ill and can’t work
Terminal illness cover: Policy pays out on diagnosis
In trust: Life policies can be put into trust for your family
Life of another: Alternative way of setting up a policy
In summary
UK mortgage lenders do not include life insurance within their mortgages. Nor are they allowed to make it a condition of lending that you buy one of their policies.
Whether a mortgage is protected, and how, is up to you.
It’s important to remember that should you die, you mortgage debt still needs to be paid. Having the right type of life cover in place makes this simple, and much less difficult for those family members left behind.
You may also like to read: What happens to a mortgage when someone dies? and Can you get life insurance if you don’t work?
