Mortgage protection life insurance: do you need it?

What is mortgage insurance?

Mortgage life insurance, also known as decreasing life insurance or mortgage protection insurance, is designed to pay off your mortgage if you die during the term of the policy. 

Your mortgage is probably one of the biggest debts you’ll ever have, and the usual plan is to pay it back over a long  period of time. But what if you die before it’s fully repaid? Could your family meet your regular mortgage repayments? With no insurance in place, your family home could be at risk. 

How does decreasing life insurance work?

Decreasing term life insurance is designed to pay off the remaining balance of a mortgage when the policy holder dies during the term of the policy at a set rate you decide when you take out the policy. Most policies allow you to choose how much cover you’ll need and the interest rate you want, as well as how long you’ll need the policy to last.

Just as a repayment mortgage decreases over time, the payout from a decreasing insurance policy gets smaller too. So, if you take out a policy for 20 years and you die seven years into it, your family could receive more than if you died 16 years after taking the policy out. In this way, it differs from level insurance, where the payout from the policy is the same regardless of when the policy owner dies, and increasing insurance, where the payout gets bigger over time.

The amount you pay each month for a mortgage protection policy stays the same throughout the policy, but the amount that dependants might receive from the policy decreases  at a set rate you decide when you take out the policy.

What is the difference between life insurance and mortgage life insurance?

A life insurance policy is designed to pay out a sum of money if the insured person dies during the term of the policy. There are products available for a fixed amount of time and those which can insure you for much longer.

Mortgage life insurance, also called decreasing life insurance or mortgage protection, is a shorter-term type of term life assurance that’s designed to cover your mortgage if you die before the end of your policy.

Ultimately, they’re both life insurance policies and with so many different types of life insurance available, it’s worth doing your research make sure you choose the most relevant product for your needs. You don't necessarily need to buy a policy with 'mortgage' in its name, as other types of cover may be just as suitable. And if you have a long-standing condition, chances are there’ll be a policy to suit your needs. There are specialist products on the market for people with diabetes and there are options if you’ve been diagnosed with cancer.

Do you need life insurance for a mortgage?

No. You don’t have to take out life insurance when getting a mortgage, although it is definitely worth considering as there are a number of pros and cons. Discussed in more detail below.

Life insurance with a mortgage: pros and cons

Pros:

• Mortgage life insurance can provide some financial security and peace of mind for your family if you die. The money can be used to pay off your mortgage or regular monthly bills. If you’re a single parent or have loved ones who need financial support, life insurance could provide a steady income to help them stay in their family home
• It’s readily available and accessible, and some products ask only a few medical questions
• Mortgage protection insurance can be cheaper than other types of life insurance when you choose comparable amounts of cover at the start, and the policy runs for the same length of time.

Cons:

• Mortgage life insurance is unlikely to be suitable if you’re looking to protect an interest-only mortgage
• The payout amount for mortgage life insurance falls every year to reach zero at the end of the life policy term. This works for debts that decrease over time, like capital and interest repayment mortgages.

If you make any changes to your mortgage, you should make sure your insurance is still relevant to your needs. If you stop making payments, your cover will end and you won’t get anything back.

Can you add critical illness cover to a mortgage protection insurance policy?

You can add critical illness cover to some mortgage life insurance policies or you might choose to take out a combined Life or Critical Illness policy through a financial adviser. By adding enough critical illness cover, your mortgage could be completely cleared if you were seriously ill with a condition listed on your policy, not just if you die. The premiums for critical illness cover will be higher, but it might be worth considering if you want to protect against this happening.

Does mortgage protection insurance protect other debts?

You can protect any debt with a life insurance policy you just need to do your research to make sure the product you buy suits your needs. The payout from a mortgage protection insurance decreases over time and so suits the decreasing nature of a repayment mortgage. Other debts may not be as well suited to this kind of product.

Can you edit my policy if my circumstances change?

Yes. If your circumstances change, such as moving house, your mortgage insurance policy might suddenly be too much or too little. Speak to your financial adviser straight away to ensure that it still meets your needs.

And if you're finding it difficult to keep up with your monthly insurance payments, don’t immediately cancel your plan. Some providers offer a payment holiday.

Complications can also arise if you split up or divorce and have a joint mortgage protection insurance policy. Some insurance policies allow for separation, you might not need to cancel the policy completely and buy a new one.

What happens if you die before your mortgage is paid off?

In a nutshell, your mortgage will need to be repaid. However, depending on how the mortgage was set up will depend on the process that follows.

If you have life insurance, the resulting payout may be used to help pay off the mortgage. With decreasing life insurance the amount paid will depend on the value of the plan at the time.

What happens to life insurance when your mortgage is paid?

This really depends on the kind of life insurance policy and the amount of cover you choose.  If you choose mortgage life insurance, the policy should decrease in line with your mortgage. This means that you’ll stop paying for the insurance once your mortgage is fully repaid.