Do I need life insurance for a mortgage?
If you have a family, your home is probably your family’s most valuable financial asset, so it's important to plan how your mortgage would be paid if you were no longer around.
Below, we explain what mortgage life insurance is, and whether you need it when buying your own home.
What is mortgage life insurance?
Mortgage life insurance is a type of life insurance policy that is designed to pay off the remainder of your mortgage if you die during the term. This gives you the peace of mind that should you pass away, your partner/spouse and dependants won’t have to worry about making mortgage repayments or, in the worst case scenario, be forced to sell their home. If you’re diagnosed with less than 12 months to live, many policies will pay out at that point.
Is life insurance a legal requirement for a mortgage?
While life insurance isn’t a legal requirement, mortgage cover is a simple way of ensuring that your home is protected, even when you’re not around. Many lenders will also stipulate that you must have life insurance in order to get a mortgage, although you might want to shop around rather than buy the policy they offer you.
Mortgage life insurance can sometimes be called 'mortgage cover' or 'mortgage protection'. You might also see the term 'assurance'. While ‘insurance’ is for an event that might happen, ‘assurance’ is for an event that will happen. For example, life insurance policies will pay out should you die during a set term, whereas life assurance policies provide cover for your whole life (also known as whole of life cover).
Mortgage protection-free cover
Mortgage protection-free cover – also known as mortgage free cover - is a special feature available through some policies and is designed to cover the period between when you exchange contracts on a home and complete the purchase. When you exchange, you enter into a binding commitment and your lender may stipulate you need insurance, but you might prefer not to take out full cover until completion.
Term insurance vs whole life: types of mortgage life insurance
There are several types of mortgage life insurance, meaning there’s likely to be a policy to suit your family’s needs and circumstances.
You can find out more about each of these types of mortgage life insurance on the Zurich life insurance page.
Types of life insurance
Level term life insurance
Level life insurance covers you for a specific time, which you can set to match your mortgage. If you die during the term, your beneficiaries will receive a payout they can use to pay off a mortgage. You can choose a higher level of payout so they receive an extra lump sum to cover living expenses. With level life insurance, the potential payout does not decrease over time. This is a more suitable cover for interest-only mortgages.
Decreasing term life insurance
Decreasing term insurance is designed specifically for repayment mortgages. It can provide cover for the term of your mortgage, with the potential payout decreasing gradually to reflect the balance you have left to pay. Because the potential payout gradually decreases, the premium paid is typically lower than with level and increasing term policies. Decreasing term cover is not suitable for interest-only mortgages, where the balance does not decrease over time.
Increasing term life insurance
You may also come across another type of life insurance – increasing term cover. This allows you to increase your potential payout each year (your premiums increase too). This type of cover is typically less suitable for mortgages but can be useful if you want to protect yourself against rises in the cost of living.
Do you need life insurance with a mortgage?
If you’re still wondering do I need life insurance?, here’s a reminder of some of the most important things to consider:
- You should certainly consider life insurance if you have a partner or dependants, such as children, still living with you. With life insurance, you will have the peace of mind that they’ll be protected financially and able to stay in the family home should you die.
- If your spouse or partner would find it hard to meet the mortgage repayments without your salary, then mortgage cover might give you peace of mind. It would be one less thing for them to worry about at a very difficult time.
However, life insurance isn’t essential for everyone. You might have savings that could be put towards repayments, an alternative life insurance product, or an employer’s death-in-service benefit. Whatever you do, you should check that the amount payable would be enough for your dependants’ needs.
See Death in service benefit and Life insurance: What’s the difference?
If you have no partner or dependants, then mortgage cover probably isn’t essential.
What happens to life insurance when your mortgage is paid?
If your life insurance policy was taken out specifically to cover your mortgage – such as a decreasing term policy – it will usually end when the term finishes, which often aligns with the end of your mortgage. Once your mortgage is fully repaid, there’s no need to keep that particular cover in place unless you want it for other reasons.
If you’ve chosen a level term policy with a higher payout, or a whole of life policy, your cover may continue beyond the end of your mortgage. In that case, the payout could still support your family with other costs, like everyday living expenses or funeral costs.
It's a good idea to review your policy regularly to make sure it still meets your needs – especially after paying off your mortgage.
If you extend or change your mortgage, or your family circumstances change, you should check your policy still provides the right level of cover to keep your family protected. You may be able to make these changes through your existing Zurich policy. Please check your terms and conditions for details.
Can you have more than one life insurance policy?
Yes, you can hold more than one life insurance policy at the same time. In fact, many people choose to take out separate policies to cover different needs – for example, one policy for mortgage protection and another to help with future family expenses and everyday living costs.
There’s no set limit to how many life insurance policies you can take out in the UK. However, insurers will assess your overall cover in relation to your income and financial commitments to ensure it's suitable. It’s a good idea to review your policies regularly, especially if your mortgage, income or family circumstances change, to make sure you’re not over- or under-insured.
Do you pay inheritance tax on life insurance?
A life insurance payout is not usually taxed as income, but it may be counted as part of your estate for inheritance tax purposes. If the total value of your estate exceeds the current inheritance tax threshold, this could affect the amount your loved ones receive. Placing your policy in trust is one way to help keep the payout outside your estate and reduce or avoid inheritance tax. Zurich policies offer the option to write your policy in trust when you apply.
Writing your policy in trust can help ensure the money goes directly to your chosen beneficiaries and could also help avoid delays in the probate process. If you’re not sure, it’s worth speaking to a financial adviser.
Considerations when applying to life insurance
When you apply for life insurance, you will be asked a few questions about your health and lifestyle to determine how much you will need to pay each month.
Life insurance medical exams
In certain circumstances, you might be asked to complete a life insurance medical exam covering factors such as your weight, blood pressure and family medical history to estimate your risk of developing health problems. If a medical exam is required, your insurer will contact you to make arrangements and there will be no cost to you.
Life insurance and smoking
If you’re a smoker or an ex-smoker, you may be worried about how smoking affects life insurance. You will probably have to pay higher premiums, which might drop once you have given up for a certain length of time – usually one to five years. Most insurers put vaping in the same category as smoking.
Still have questions about life insurance?
You can try Zurich’s life insurance calculator to work out how much cover you might need.
Read Single or joint life insurance: Which is right for you?
Or read our life insurance guide to find out more about protecting your family and home.
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