Mortgage protection when you’re buying a home

There’s no law that says you must have life insurance if you get a mortgage. However, you might find that some mortgage providers require you to take it out. If you do want life insurance to help cover your mortgage, you’ve got several options. You can either look to your mortgage adviser or to your financial adviser if you have one. Or come directly to an insurer like us.

The type of life insurance that’s right for you depends on your particular needs. You can discover more about the different types of life insurance here .

If you’re new to home-buying and busy getting to grips with deeds and disbursements, it’s natural not to have the long-term picture front of mind. But this is often when people first take out life insurance. 

Some mortgage lenders will prompt you to look into life insurance when you’re applying for your mortgage – and for some, it’s part of the agreement.

With this type of life insurance, if you die within the policy term, the lump sum payout should be enough to help pay off the rest of your mortgage. Our cover also pays out on a terminal illness diagnosis, if you aren’t expected to live longer than 12 months.

Whether or not it’s mandatory, your motivation is likely to be peace of mind that your loved ones could use the lump sum to afford to stay in their home when you’re gone, without having to move at a difficult time. And having children either now or in the future can add an extra incentive to help create that financial security.

When you buy a life insurance policy with us, you choose between level cover, also known as family protection, or decreasing cover, also known as mortgage protection. They’re term life insurance, so they last for a specific number of years. Either could help pay off a mortgage, but which you choose might depend on the type of mortgage you have, and if you want to help cover other costs.

Decreasing cover

If you’re looking for help to make sure a repayment mortgage could be paid off if you die during the term of the policy, you could choose decreasing cover. Your premiums are fixed and as the amount left to pay on your mortgage gradually decreases over time, so does your cover amount. 

Level cover

If you want to cover more than a mortgage, and also help maintain the living standards of your family, you could choose level cover. The lump sum payout could be used to pay off an interest-only mortgage or keep up mortgage repayments, but it could also go towards general living costs and monthly outgoings. 

Again, cover lasts for a specific number of years and your premiums are also fixed, but the cover amount stays the same. So if, for example, you have £120,000 as a cover amount, that’s what the payout amount on a valid life insurance claim would be. Level cover tends to cost more than decreasing cover, as it’s a set lump sum that doesn’t decrease over time.

Protect against inflation

You can also choose to protect your cover amount from the effects of inflation, so the lump sum won't be worth less in the future because of the rise in the cost of living. This means your cover amount will rise over time, and your monthly payments may increase. The maximum annual increase would be 15% to your premium and 10% to your cover ^{Footnote [1]}.

Single life or joint life

If you’re buying a new home with your partner, you can take out a joint life insurance policy, or choose single policies. A joint policy usually costs less than two separate policies, though it pays out when the first partner passes away and ends after that. The money will usually go to the surviving joint policyholder or, if you have a single life insurance policy, it’s paid into your estate.

Trusts

It’s worth knowing that if you put your life insurance policy in a Trust, the lump sum will usually be exempt from IHT and it won’t be counted as part of your estate. The money can often be paid to beneficiaries more quickly too . ^{Footnote [2]}

Perhaps you’ve outgrown your home and you’ve agreed a bigger mortgage. This might coincide with moving in with your other half or needing more bedrooms for new members of the family. Or maybe you’re downsizing, and have a much smaller mortgage, so you need a lower cover amount. 

Whether or not you already have life insurance, you’ll most likely want to consider a policy term and cover amount that’s in line with your new mortgage, or your new financial circumstances. If you have a policy with us, you may be able to increase or decrease your cover amount or cover term without having to take out a new policy. You can contact us to do this, but you might want to talk to a financial adviser first, to discuss your options. You can find one at unbiased.co.uk.

You might assume that if you’re buying a second home, perhaps as a buy-to-let investment, you don’t need to consider it as part of your life insurance cover amount. But it’s worth thinking about how the mortgage debt could be settled once you’re gone.

The payout from a life insurance policy could be used by your beneficiaries to help pay off the mortgage on your buy-to-let.

If you’re taking out life insurance with us at the same time as buying a home, you get up to 90 days of free home purchase cover. Once we’ve accepted your life insurance application, the free cover starts when you’ve exchanged contracts and lasts until completion – provided you’ve given us a future start date that matches that. You can find out more about our home purchase cover and Protection Promise in our Life Insurance Plan policy summary.

Most people can get an instant decision about life insurance from us. But sometimes we might need a little bit more information first. If that happens, you’ll still be covered thanks to our Protection Promise. It means you’re covered straight away, free of charge, for the cover amount you’ve applied for, up to £500,000. This lasts until we’ve made our decision, you withdraw your application, or up to 90 days after we’ve confirmed your Protection Promise cover has started.

Mortgage protection might cost less than you think. If you think the cost of life insurance puts it out of your reach, this example might be of interest – it’s possible for a non-smoker aged 32, with a cover amount of £150,000 over 25 years, to get a decreasing cover life insurance policy with us for as little as £7.68. ^{Footnote [3]}