Mortgage life insurance

What is mortgage life insurance?

Mortgage life insurance (also known as decreasing term insurance or mortgage cover) is designed to pay off your remaining mortgage balance if you die before it's fully paid off. It's not directly linked to your mortgage – so you can use it for anything, not just a mortgage – but mirrors how a mortgage is repaid. But as it's not directly tied to the mortgage, if you repaid your mortgage early and then died within the policy term, it'd still pay out.

As the amount covered by your policy decreases over time, it's usually cheaper than level-term life insurance – which pays a fixed lump sum if you die. The amount you pay each month (the premium) doesn't usually reduce, instead that's fixed for the lifetime of the policy. There are other types of life insurance too that could sit you better, so do check.

How to decide if and when to get mortgage cover

It’s not compulsory, but many people choose it when they take out a mortgage to help protect their family financially. If you’ve got dependants (eg, children or a partner) who rely on your income, and losing it would make it hard to cover the mortgage, bills and everyday expenses, mortgage life insurance could be worth it – but first check if any of these apply:

• Got no dependants? If there's nobody to inherit your property and mortgage debt, then you don't need it – there's no point.

• Mortgage nearly paid off? If your mortgage debt is small – meaning your dependants can comfortably cover the outstanding debt – then it's likely not worth it.

• Got cover via your employer ('death in service')? This pays out a multiple of your salary, usually three or four times, while you're an employee of that company. If this is enough to cover your mortgage, bills and everyday expenses, you may not need it. But remember, if you change or lose your job, you may want consider getting a separate policy.

• Got another type of life insurance? For example, if you’ve got a level-term life policy, it might already cover the mortgage – just make sure the pay-out is enough to clear your mortgage balance and the policy lasts as long as your mortgage term.

• Paying an interest-only mortgage? This type of policy is only suitable if you have a repayment mortgage – where you're clearing the original debt, not just the interest. If you're only repaying the interest, your mortgage debt remains unchanged over time, so the insurance cover wouldn't be enough to clear the debt.

You can get a joint policy or two single policies

Couples can choose to get a joint policy that covers you both and usually pays out the whole amount on first death, or two single policies that cover each of you separately with two separate pay outs. We checked for a healthy non-smoking couple aged 50, for 20 years of cover via an execution-only broker, though patterns can change so it's worth getting quotes.

Advisory brokers tend to recommend two single policies as it gives a pay-out linked to each parents, so there is less of an issue if couples split up. Yet the decision is yours, so if a joint policy works out cheaper, it's worth considering. So it's always worth getting quotes either way.

If you did split up, a joint policy can sometimes be dealt with as part of a financial settlement, but it varies by insurer and policy. It may be possible to transfer ownership or convert it into separate policies, though many joint policies instead need to be taken over by one person or cancelled. And the new premiums would be priced on your new age and health, which would likely be more expensive.

How to buy life insurance as cheaply as possible

The worst way to get mortgage life insurance is by going straight to a bank or insurer - you won't get any discounts and can't easily compare to the rest of the market. Many people use regular comparison sites, which scour the market to find you the cheapest deal, but they don't offer any advice yet still take a huge whack of commission.

Instead, you can slash costs by using specialist brokers. Two types:

• The very cheapest route is via an execution-only non-advised discount broker – but ONLY if you know what you're doing. With a top execution-only discount broker you pay a small fee, say £25, it shows you the cheapest providers and rebates all the commission it receives, this is often £1,000s over the life of a policy. In practice this just means you pay far less each month. Yet it is totally 'unadvised' meaning you get no help and need to know what you're doing.

• Unsure, want help, have a medical condition or complex circumstances? Use an advisory broker. A good advisory broker will find you the cheapest policy and give personalised regulated advice (often over the phone) to help you choose what's right for you. Yet it will keep the commission (that's how they're paid). If you have an independent financial adviser, it should be able to help too.

The table below shows how much you'd pay for a similar like-for-like policy via different buying routes – it highlights how much cheaper it is to buy via specialist brokers.

Before you apply – crucial need-to-knows

The more cover you get and the longer the term, the more it'll cost. But old age, poor health, being a smoker, and even having a risky job will all increase how much you'll pay, too...

• Consider writing your policy in trust. This means the pay-out goes directly to the person who will ultimately receive the money, so it's not part of your estate, therefore there is no inheritance tax and it eases probate or equivalent (the legal process of handling someone's affairs after death). In some cases there's a simpler alternative to this in the application form, where you can include a ‘beneficiary nomination’ which works in a roughly similar way. An advisory broker will usually go through all this with you, if you use an execution-only broker most have the form available, if you ask.

• Declare ALL pre-existing physical and mental health medical conditions or it could invalidate the policy. If you've needed medical treatment, assistance or medication in the past, for physical or mental health conditions, it could be considered a pre-existing condition, for example, high blood pressure.
  
  Check how far the insurer asks you to go back, and be honest, or it could nullify the policy or reduce the pay-out (though for some, sadly, pre-existing conditions can make it very costly, which is why we suggest you get advice (use an advisory broker in that case). More in our Life insurance with a pre-existing condition help.

• Choosing Guaranteed premiums is usually cheapest. A premium is literally just the amount you pay each month for an insurance policy. When buying life insurance, you can usually choose either Guaranteed premiums (the amount you pay each month stays the same for the whole policy) or Reviewable premiums (often cheaper at first but the insurer can hike the price later – this is more common if you link the insurance with critical illness (a more complex policy choice).

Cheapest execution-only brokers – if you know what you want

These are by far the cheapest option, but you need to know what cover you want. Below are the brokers we've found to be the cheapest, and have decent feedback. All charge a one-off £25 broker fee. They've been our top picks for over a decade – the prices tend to be similar, but its worth checking a couple

• Cavendish Online (tends to have the best online 'writing in trust' info)

• Moneyworld

• Money Minder

If you call any of these companies before you buy make sure you're clear on whether you're getting 'advice' or 'information'. If they're advising you, or pushing you towards one policy over another, they need to do a full check on your financial and medical circumstances and insurance needs, so it'll cost more. Do ask if you're not sure.

If they call you to verify any details, tell them you want 'non-advisory', or it could get pricier.

Cheapest advisory brokers – if you need help choosing

Advisory brokers ask in-depth medical questions, and look into your finances to gauge your commitments. When we researched these brokers, one wasn't consistently cheaper than others, it depends on the circumstances, so try a couple if you've time.

We've been to the three big ones and bagged extra incentives for you, so if the price is similar, the incentives can impact who's cheapest – but it depends on your monthly premium, see which incentive wins based on my monthly premium?.

With all three, to get the incentive, ADVICE IS BY PHONE...

If time, you may want to check firms brokers don’t include

Most mainstream insurance firms are included in brokers’ searches (both execution-only and advisory). Yet a few firms make a play of being direct only, which means brokers can’t include them. We’ve done sample quotes on them and not found them to be competitive, even when they include incentives, but we wanted to let you know in case you wanted to check.

The direct-only deals tend to fall into two camps. The first are mutuals (ie non-profits), such as NFU Mutual, Foresters Financial and Smart Insurance. Then there are retail brands that provide other firms' underlying insurance but at slightly different prices. For example, Legal & General is offered via Sainsbury's, Aviva is offered through Tesco and Scottish Friendly is offered through Post Office. There's also SunLife which isn't available to most brokers, which specialises in over 50's cover.

Struggling to find cover? Still unsure?

If the firms above weren't able to help, or you'd rather find someone local to where you live, head to the British Insurance Brokers Association and use their 'Find insurance' search. Make sure to select 'Life insurance' when it asks what you'd like to insure.

Alternatively, you can speak to an independent financial adviser (IFA), who may be able to see how life insurance fits in with your wider circumstances. It's also a good idea if you'd prefer face-to-face advice, as most brokers are phone-based. Costs can vary depending on whether you pay fees or commission. For more and how to find an adviser, see our IFA guide.

Can you cut the cost of your existing policy?

You’re not tied to your existing life insurance. You can get a new, and hopefully cheaper, policy at any point. But never cancel an existing policy until the new one is fully in place, or you won't have any cover.

Whether or not you'll save largely depends on your age, how your circumstances have changed and when and how you bought your old policy. It’s particularly worth getting fresh quotes if:

• You've recently quit smoking or vaping. To count as a non-smoker (or non-vaper) you need to have been nicotine-free for at least a year, or in some cases five years. If you've recently quit, get it noted on your medical records to back up any potential claim.

• You originally bought your policy directly from an insurer or bank. If so, buying via an execution-only discount broker or advisory broker could save you £100s or more.

• You no longer have a risky job. If your new job has less risk, it could reduce your premium.

• You've taken out a new mortgage product and have changed the length of your mortgage term. Review your policy each time you take out a new mortgage product, and remember to cancel the policy if you've fully repaid your mortgage and don't need the financial protection for anything else.

How much you'll save will vary. The benefits from the above factors could be offset by the fact you're now older – and thus higher risk – which will drive up your cost. But it's well worth checking, the savings can be huge, as this success shows...

Other types of life insurance

There are other types of cover that may suit your circumstances better than mortgage life insurance:

• Level-term life insurance. Pays a fixed amount if you die within a set time. After the policy ends, it won't pay out, so make sure the term is long enough. Read more in our Life insurance guide.

• Family income benefit. After you die, the policy pays out a tax-free monthly income for the remainder of the term, rather than a fixed lump sum. It's complex, so consult a Financial adviser.

• Over-50s' life insurance. Frankly, we think most people should avoid this. It's an expensive policy that might cost you more than it ever pays out. See our Beware over 50's life insurance guide.

• Whole-of-life insurance. Usually to cover Inheritance Tax. It runs until you die, but is usually expensive and poor value for families who just need cover while they have dependants.

• Critical illness cover. Read our full Critical illness cover guide to see if it's worth it.

Life insurance FAQs