Owning a home is one of the most significant investments most people will make in their lifetime. A mortgage in particular can take decades to pay off. During that time, unexpected events can occur that may impact your ability to make those payments and could even put your home at risk.
There are plenty of financial products available to protect your mortgage, but one that seems to go under the radar is life insurance. While many view life insurance as a way to provide for loved ones after death, it also can act as a safeguard for your mortgage.
In this article, we’ll look at how life insurance can be used to protect a mortgage, the types of policies available, and how much it could cost you.
What is mortgage life insurance?
Mortgage life insurance is a type of life insurance used to help homeowners pay off their mortgage in the event of their death. This type of insurance provides a death benefit that is specifically designated to cover the outstanding balance of the mortgage. In doing so, it could ensure that your loved ones are not burdened with the responsibility of making mortgage payments or, in a worst-case scenario, losing the home.
How does it work?
You can choose to take out life insurance at the same time as a mortgage, or a later date. If you die whilst covered under the policy, the insurer will issue an agreed sum to your chosen beneficiaries (typically your family or spouse) or to your mortgage lender. They can then use the money towards any remaining mortgage payments or to pay off the mortgage in full.
When you apply for cover, your insurer will want to know how much you wish to be covered for (known as the ‘death benefit’). This could be the exact amount of your mortgage or more if you want your family to have additional funds.
Once your policy starts, you are required to pay a premium either monthly or annually. In doing so, the policy will remain active, ensuring you are covered if you die during the agreed term. If you stop paying your premiums, your insurer may end your policy early, and you won’t be entitled to a refund on the premiums paid up to this point.
Why would I need mortgage life insurance?
You may need life insurance cover if:
- Your family would struggle or be unable to make repayments without your income
- You want to reduce the financial burden left on your family upon your death
- Your family has no significant savings to fall back on
- You want to help your family with other costs, such as your funeral costs and living expenses
Which type of life insurance should I use to cover a mortgage?
There are a number of life insurance policies that can be used to cover a mortgage, including:
- Decreasing term life insurance โ As a ‘term policy’, this will cover you for a set amount of timeย which can be tailored in line with a repayment-type mortgage. As you make repayments over time, the death benefit will reduce until the mortgage is repaid. If you die during the policy, the death benefit should help your family cover the remainder of your mortgage.
- Level term life insurance โ Typically used to cover an interest-only mortgage. Both the death benefit and the cost of your premiums remain the same throughout the policy. In this instance, your family will receive the same amount as originally agreed. They can also use the money towards other costs if your mortgage has already been paid off or reduced.
- Whole life insurance โ Unlike term policies, this type of cover pays out regardless of when you die (as long as you keep paying your premiums). If you die before the mortgage is repaid, your family could use the death benefit towards repayments. However, if it has already been repaid, they could use it on other costs. As cover is typically permanent, the premiums for this policy are usually more expensive than for term life insurance.
For term life policies, a payout will only be made if you die within the agreed term. Once you reach the end of the term your cover will expire and no claim can be made if you pass away after this point.
You could also consider getting a joint life insurance policy, especially if you and your partner/spouse share a mortgage. In this case, the policy would cover you both under a single policy, paying out if you or your partner/spouse dies. The survivor could then use the death benefit to cover any future payments or pay off the remaining mortgage in full.
How much will it cost to buy life insurance?
While your mortgage is a significant factor in determining the cost of life insurance, it also depends on other elements, such as:
- Your age
- Health
- Occupation
- Policy type
- Cover amount + length
Ideally, you will want enough cover so that your family will be able to pay off the mortgage. You may also want to support them with other costs or to leave a legacy which could increase your premiums. There are also lifestyle factors to include such as how much you drink alcohol, or if you are a smoker, which can also increase your premiums.
How to get life insurance
In this day and age, getting life insurance is easy and can often be done entirely online. Here are the steps to help you secure a life insurance policy:
1. Work out how much you need
Consider your mortgage balance, any other debts, and further expenses your family may face, such as living expenses and funeral costs as well as any other debts or loans.
2. Explore different policy options
Look into various types of life insurance policies, such as decreasing term, level term, and whole life insurance. Compare their features, benefits, and costs to see which one aligns best with your family’s needs.
3. Get quotes from multiple insurers
Get a quote from several insurance providers to find the best deal. Many insurers offer online quotes that allow you to enter your details and receive estimates quickly.
4. Apply for a policy
Once youโve selected a suitable policy, you can proceed with the application. This usually involves filling out an online form and providing information about your health, lifestyle, and cover requirements.
5. Wait for approval
After submitting your application, the insurance provider will review your details. They may ask for additional information or require a medical exam depending on your health and medical history.
6. Review your policy annually
Your circumstances could change over time, so itโs important to review your life insurance policy regularly. If your mortgage balance reduces, you may want to adjust your cover accordingly. You may also experience significant life changes, such as marriage, the birth of a child, or changes in employment which may mean increasing your cover.
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