Why do we need life insurance for a mortgage?18 November, 2014
Life Insurance isn’t always something we initially consider when searching for a new home but its importance shouldn’t be underestimated. Mortgage companies often ask for Life Insurance cover, to protect against outstanding payments in the event of your death. However, there are a number of reasons why it is also essential for your own peace of mind.
If you have a partner or family who relies on your income for living in a mortgaged house that you pay – a Life Insurance policy can help pay the debt for them if you die. The government offers you the possibility to claim various Death Benefits including bereavement; however, in the vast majority of cases, this is not enough to help cover the existing debt at the time of death. Life Insurance instead gives you and your partner the peace of mind in the knowledge your mortgage debt can be completely covered.
Photograph: Inxti on Shutterstock
What do I need to consider?
There are a few factors that are worth considering if you’re thinking of getting Life Insurance with your mortgage.
- What sort of mortgage is it? The type of mortgage you have might influence the sort of Life Insurance you opt for. If you have an interest-only mortgage – which is paid off in a lump sum at the end of the term – then level-term insurance could help you match the fixed level of debt. Decreasing term insurance on the other hand matches decreasing debt, such as that from a repayment mortgage. Read more about what Life Insurances are available on our Types of Life Insurance page.
- Do you have an existing Life Insurance policy? If your circumstances have changed since you first took out your Life Insurance policy then you could find a cheaper policy by switching. View our switching guide for more information.
- Are you upsizing? If you’re moving to a bigger house you’ll probably need to upgrade your life cover, because you are taking on more debt.
- Does your employer offer a death in service benefit? These pay multiples of your salary if you die while employed by the company. It’s worth checking what, if any, cover you have and whether this is enough to financially support your family to pay any outstanding mortgage repayments.
Go for the best option, not the easiest
Many mortgages come with Life Insurance tagged on, which can seem like the easiest option. Unfortunately, these add-on Life Insurance policies aren’t always tailored to offer the best possible value.
New homeowners are particularly vulnerable to purchasing add-on life cover from lenders when signing up for their first mortgage. Being such a huge investment, new homeowners will often buy the life cover offered as part of the bank’s mortgage package without realising they could be missing out on savings by buying it elsewhere. On top of the missed savings, buying Life Insurance without fully understanding what they’re getting can leave the new homeowner with a policy that doesn’t suit their needs.
Life Insurance is all about securing your families financial future with added protection if you die, so if the wrong type of insurance is purchased then this could impact how well your family is protected.
For more information on decreasing term and mortgage Life Insurance, and to find out what is best for you, browse information on Decreasing Term Life Insurance or through the Beagle Street Life Insurance Guides.