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mortgage life insurance

Mortgage Life Insurance

Save £100s on your cover

Tony Forchione
Tony Forchione and Steve Brigden | Edited by Helen Saxon
Updated Quarterly

If you were to die before your mortgage is repaid, your loved ones may have to pick up the repayments, or be forced to sell the property to repay the lender. This guide takes you through what mortgage life insurance is, what to watch out for and how to buy a policy – as you don't need to take it from your mortgage lender.

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Who's this guide for? Anyone looking for insurance to pay off their mortgage if they were to die (so the amount it'd pay out reduces over time). If you want life insurance that pays out a fixed lump sum, regardless of your mortgage payments, head to Life Insurance.

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What is mortgage life insurance?

Mortgage life insurance – also referred to as mortgage protection – is a type of insurance that pays out if you die before you finish paying your mortgage.

Its aim is to stop anyone you leave behind from worrying about paying the monthly repayments, or be forced to sell the property to repay the amount still owed.

There are two main types of mortgage cover:

1. Decreasing term – where the payout reduces in line with your mortgage balance

This is the most common, and usually the cheapest, as the amount you're covered for decreases as you pay your mortgage off (though your monthly payments stay the same). This leaves your dependants with enough money to pay the rest of the mortgage.

It's therefore designed for repayment mortgages – the most common type where the amount you borrow is fully repaid at the end of the term. 

This guide focuses on these policies, though it's always worth looking at level-term insurance too - if both policies aren't too different in price, level-term could be a better option as it provides more cover.

2. Level term – where the payout is fixed for the length of the policy

These policies tend to be more expensive, as they pay a defined lump sum if you die within a fixed time, for example, £200,000 if you pass within the next 18 years. However this could be better if you want to leave a lump sum for your dependants to cover more than just your mortgage, for example other debts and/or ongoing spending.

Level-term is also likely to be a better bet if you have an interest-only mortgage, as the lump sum would be available to cover the capital rather than just the repayments. See our Level Term Life Insurance guide for full information.

Should I get mortgage life insurance?

If anyone relies on your income to pay the mortgage and would struggle to keep up with payments without you around, a mortgage life insurance policy can be a cheap way to ensure they have a financial lifeline when you're gone.

Though, ultimately, you don't have to have life insurance so you'll need to weigh up whether the monthly cost is worth it for you. To help, here are two key points to consider:

  • If you don't have dependants, you don't need life insurance. 

    You may not need to get a mortgage life insurance policy (or indeed any other sort of life insurance) if no one relies on your income to pay the mortgage, eg your partner and/or children. It would mean, however, that whoever inherits your property may need to sell it, unless they're in a position to pay off your mortgage, or get a mortgage on the property themselves.

  • If you've already got a life insurance policy, it's likely you're already covered.

    You may not have 'mortgage insurance', but if you already have a level-term life insurance policy then this'll give your dependents a lump sum if you die. However, they'd want to use the insurance sum to pay off the mortgage, you'll need to ensure the amount you're covered for exceeds the amount you owe, and the policy is in force for as long as your mortgage term. 
     

Mortgage life insurance need-to-knows

If you think mortgage life insurance is right for you, here are our key need-to-knows to understand before opting for a new policy.

  • 1. Opt for 'guaranteed premiums' as this means the monthly cost is fixed

    When you buy mortgage term cover you will be given two choices of monthly payment (premium) – guaranteed or reviewable.

    If your premiums are guaranteed, your insurer will never change the price, so you'll know what you'll be paying over the life of the policy. Reviewable premiums, on the other hand, often cost less at first, but your insurer can hike costs later on, meaning a cheap deal can potentially become costly as you age.

  • 2. Disclose all health conditions and risks when you apply or your insurer may not pay out

    It's important you're open and honest with any information you provide, to ensure any policy that's set up for is fit for your needs – and will cover you if the worst were to happen and your dependants needed to make a claim. 

    Likely things you'll need to disclose when getting a quote for a policy include your age, whether you smoke, your occupation and your health history. The insurer then uses this information to determine whether it will cover you and a price. 

    If you're comparing quotes yourself via a discount broker, you'll usually answer a few basic questions to see initial prices, but will then have to disclose much more detailed information if you then go through to the insurer to apply, which could affect the price/the decision to insure you. 

    As each insurer has its own rules on pre-existing medical conditions, if you've a complicated medical history, it's worth getting advice before you buy. This is helpful as brokers tend to know which insurers will cover your condition(s), and at the best rates.

    If you're over 50, you can get a policy with guaranteed acceptance – but it's much more expensive 

    If you don't want to disclose health issues and are 50 or over, an over-50 policy is an alternative which doesn't require any health questions and there's guaranteed acceptance up to age 80 or 85. Yet to compensate these are much more expensive, you can't claim in the first one or two years and you could get back less than you pay in.

    For full information and warnings, see our Over-50s' Life Insurance guide.

  • 3. A joint policy for a couple only pays out when the first person dies – two single policies can be better

    Mortgage life insurance policies can either be taken out to cover just you – a single policy – or yourself and your partner – a joint policy.

    A joint policy is often cheaper, however it only provides one payout, usually on the death of the first policyholder, when the cover then stops. This is usually best suited if your partner is your only dependant and you'd have no one else to leave a second payout to.

    However, if you had a joint policy and were to later split with your partner, you'd need a new single policy, and this could be more expensive as it would be based on your new age and health. 

    Taking out two single policies is usually more expensive, but here you would get two payouts if you were both to die during each policy term. Equally it covers you personally, so works independently to whether you are still together with your partner or not. 

  • 4. Write your policy 'in trust' and the money can't be claimed by the taxman

    If you die with an active mortgage life insurance policy, the payout forms part of your estate, which could mean it's hit with a huge whack of Inheritance Tax. Yet, in many cases it's possible to avoid this by writing the policy in trust, if it's done at the time the policy is taken out.

    If the policy is written in trust, the insurance pays out directly to your dependants, so it never becomes part of your estate, which avoids inheritance tax and often speeds up the payout.

    It's relatively easy to do as most insurance policies include the option (and papers) for writing in trust directly at no extra charge. Note that there are different types of trusts and they can be difficult to change or cancel, even if all your beneficiaries agree, so think carefully about who a payout would be going to.

    If you know what you're doing, you can write the policy in trust yourself. If not, seek advice from a top advisory broker or see our guide on Independent Financial Advisers.

  • 5. You can ditch and switch to save (eg, if you've quit smoking or remortgaged and owe less) but savings aren't always possible

    Life insurance usually gets more expensive with age, so savings aren't always possible. The fact you're older, or if you've had health conditions since you got the policy, can mean new policies are more expensive than the one you have. Yet there's no harm getting a quote, especially if any of the following applies: 

    • You took your policy direct from your mortgage lender (and your health is largely unchanged). If you took out a policy via your mortgage lender or without getting multiple quotes first, it's likely you could stand to save from switching policies. Plus, there's no harm in running some new quotes to check. If it shows you can save (make sure the cover is at the same level), all you need to do is set up the new cover. Once it's in force, cancel your existing policy.

      As MSE Eesha found: "I took out cover 3yrs ago for £23/mth. I then decided to run some new quotes and found the SAME policy with the SAME provider for £9/mth. Over the 15 years that's left I'll save £2,520."

    • You've since quit smoking, or you no longer have a risky job. Non-smokers pay a lot less than smokers, because they're a lot less likely to die during the term. To count as a non-smoker, you need to have been genuinely nicotine-free for at least a year and in some cases up to five years, so always check.

      Therefore one year after you quit, get a new quote and see if you could save big. But don't be tempted to lie. If you die and it is discovered you had been a smoker, it could invalidate the policy. If you are seriously giving up, it's a good idea to get it noted on your medical records to back up any potential claim. 

    • You've remortgaged or changed properties and no longer need as much cover (and your health is largely unchanged). If you took out a policy to cover a £200,000 mortgage but have since moved, paid off a lump sum or remortgaged and you now owe much less than you were expecting, you could find a new policy covering the amount you now owe is cheaper yet still meets your needs (and your new cover will be for a shorter time period, which will help too).

  • 6. You're protected if your insurer goes bust

    Many things can happen during the lifespan of the policy, and while your broker or mortgage insurance company may be doing well now, it could be a different scenario 20 years down the line. Here's how you could be affected:

    • If your insurer went bust. If your provider goes bust, the Financial Services Compensation Scheme (FSCS) will try to find another insurer to take over your policy or issue a substitute one. Equally, if you've ongoing claims, or need to claim before a new insurer is found, the FSCS should ensure you're covered. 

    • If your broker went bust. The only payment you're likely to make to a broker will be the fee for arranging the policy, which is often no more than £25. 

      In the unlikely event your broker went bust after you paid it but before your insurance was arranged, the chance of you getting your money for the fee back is slim.

      The FSCS would be able to help with any premiums lost as a result of a broker going bust, as these payments are ring-fenced, but this is unlikely to extend to broker fees.

How to slash the cost of mortgage insurance quotes

Never blindly go with a policy offered to you by your mortgage provider. These are often heavily inflated and you're under no obligation to take it – mortgage life cover is completely separate from your mortgage agreement and lender. 

Instead, you should get quotes from a number of insurers. Yet unlike other insurance such as car or home, the cheapest prices are not on common comparison sites. In general, you'll find the cheapest quotes by going to a broker. Yet there are two ways to do this:

Getting advice from a broker – best if you need help choosing

If you're not sure what kind of policy you need, or you have complicated medical conditions or other circumstances, it's worth getting advice on buying cover. Doing this means the advisor will take some commission, so it's not the very cheapest way to buy – though it should result in the most suitable policy.

To find a life insurance adviser, head to the British Insurance Brokers Association website and use their 'Find insurance' search. Make sure to select 'Life insurance' when it asks what you'd like to insure. 

Buying from a discount broker – best if you know what policy you want

If you know what you're doing, you can go via a specialist discount broker. This is the very cheapest way to buy life insurance, but it does rely on you knowing what sort of policy you want to buy. 

These brokers are cheapest as they rebate commission they get from the insurer to you as a discount. You may still pay a fee to use these brokers, but it's usually just £25 or so, and can save you £1,000s over the life of a policy compared with buying from a bank or direct from an insurer. 

We'd suggest checking at least the top two and add in the third if you've time, and remember – if you're not sure what you're doing or if a policy's suitable, it's likely better to get advice.

Important. If you do pick up the phone to speak to any of these companies before you buy, make sure you're clear on whether you're getting 'advice' or 'information' - ask the person you're speaking with.

If they're advising you, they need to do a full check on your financial and medical circumstances and insurance needs before suggesting policies to you. If they're just giving you information about policies or answering your questions, that's fine, but here you shouldn't be pressured in to taking one policy over another.

How to complain about your insurance provider

The insurance industry doesn't always have the best reputation for customer service. Plus, while a provider may be good for some, it can be hell for others.

Common problems include claims either not being paid out on time or at all, unfair charges, or exclusions being hidden in small print. It's always worth trying to call your provider first, but, if not, then…

You can use free complaints tool Resolver. The tool helps you manage your complaint, and if the company doesn't play ball, it also helps you escalate your complaint to the free Financial Ombudsman Service.

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