Life insurance with a mortgage: how to choose the right policy
Decreasing or level cover, one joint policy or two single ones? How to protect your home and family if the worst happens.
A mortgage is usually the biggest financial commitment of your life, paid off over 25 years or more. Few people like to think about it, but it's worth asking: what would happen to the home and the family if one of the borrowers died? That's what life insurance is for. Your lender will always require buildings insurance, but protecting your life is worth arranging whether or not the lender asks for it.
How does life insurance work with a mortgage?
You choose the amount of cover and how long it lasts, usually the same as the mortgage term, and pay a monthly premium. If you die during that time, the insurer pays out, and your family can use the money to pay off the mortgage. That means they don't have to worry about repayments or selling the home at the hardest moment.
Decreasing or level cover?
This is the most important choice with a mortgage:
- Decreasing termThe amount of cover goes down along with the mortgage balance. It suits a repayment mortgage and is usually cheaper.
- Level termThe amount stays the same for the whole term. It suits an interest-only mortgage, or leaving your family extra money on top of clearing the mortgage.
One joint policy or two single ones?
If you're buying with a partner, you have two options:
- Joint lifeOne policy covering two people. It pays out once, on the first death, and then ends. It's usually cheaper than two single policies.
- Two single policiesEach person has their own cover. They cost a little more, but if you both die there are two payouts, and after the first payout the other person is still covered.
Is it worth adding critical illness cover?
You can add critical illness cover to life insurance. It pays out if you're diagnosed with one of the conditions listed in the policy, such as cancer, a heart attack or a stroke. That money helps with the mortgage when illness stops you working. More and more people see it as just as important as the life cover itself.
Writing the policy in trust: what few people know
A life policy can usually be written in trust. That way the payout goes straight to the people you choose, often faster, because they don't have to wait for probate. In many cases it also stays outside your estate. It's a simple step when you set up the policy, and it can make things much easier for your family. It's worth thinking about alongside a will, which we covered in Why you should have a will in the UK.
What affects the price?
The premium depends mainly on:
- AgeThe earlier you take out a policy, the lower the premium.
- HealthThe insurer asks about conditions and treatment.
- SmokingSmokers pay noticeably more.
- Amount and length of coverMore cover and a longer term mean a higher premium.
- Type of policyDecreasing cover is cheaper than level, and critical illness cover adds to the cost.
When is the best time to sort it out?
Ideally together with the mortgage: then you know the exact amount and term, and the policy can protect you from the day you buy. It's also worth reviewing at every big change: a remortgage, a new baby or a new job.
Buying a home, or already have a mortgage without cover? Get in touch. Alongside your mortgage, we'll help you find cover that fits your family and your budget, in Polish or English and with no obligation.