Guides

This content was reviewed and approved by Geoff Eaton and Fiona Robson.

In general, having financial protection in place makes sense if you’re a homeowner. After all, your mortgage is likely to be the biggest debt in your lifetime. Where possible, you don’t want to leave such a large debt for your loved ones to pay if you pass away, and that’s where mortgage life insurance comes in.

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

What is mortgage life insurance?

For the majority of UK residential mortgage borrowers, their mortgage borrowing is set up on a capital and interest repayment basis. The main part of this article focuses on this type of mortgage, with cover for other types of mortgage detailed later on.

Mortgage Life Insurance, also known as decreasing life insurance, decreasing term assurance (DTA) or Mortgage Term Insurance, is used to cover any remaining balance on your capital and interest repayment mortgage if you pass away before it has been repaid. So, instead of leaving your loved ones with a hefty debt, the death benefit from a life insurance policy can be used by your loved ones to help pay off most or all your mortgage balance.

Essentially, when you first purchase your policy at the time you take your mortgage, additional borrowing or remortgage, you’ll select a total amount that equals the initial amount you’re borrowing. As you make repayments towards your capital and interest repayment mortgage each month, the death benefit provided by your mortgage life insurance policy will also decrease in a similar way to your outstanding mortgage balance.

What’s the difference between level life insurance and mortgage life insurance?

In truth, they’re similar products. A level life insurance policy is designed to cover whatever you need it to, such as an interest-only mortgage, additional income for your family, or potential childcare costs in the event you pass away. A mortgage life insurance policy, (or decreasing life insurance), is designed specifically to provide cover for your capital and interest repayment mortgage. Otherwise, they both have similar functions and will pay out if you pass away before your policy expires.

Although you specify the total amount of cover you want at the start of a policy, your loved ones won’t receive this initial amount if you pass away during the capital and repayment mortgage term. That’s because your mortgage life insurance policy will decrease in a similar way to the amount you owe on your mortgage as you pay off more each month. The idea is that, if you sadly pass away, your death benefit can help to cover any remaining balance you had left to pay. Doing this could majorly help your loved ones who might otherwise have inherited your debt.

How does mortgage life insurance work?

Mortgage life insurance or mortgage term assurance works in similar ways to other term life insurance policies. When you initially take out a policy, you’ll request a total amount of cover that you want your loved ones to receive in case you pass away. However, the key difference is that for mortgage life insurance or mortgage term assurance, the amount of cover you have decreases over the term of your policy. This is designed to decrease, in a similar way to the amount that you own on your mortgage decreases, as you make repayments.

How much does it cost?

As everyone’s situation is different, your monthly premiums will depend on a few factors. These include:

• The provider you take your insurance policy out with.

• Your age.

• Your health.

• Your lifestyle choices.

• Your total cover amount.

• How long you want the cover for.

• Your home address.

• Any add-ons, such as critical illness cover

Why do you need mortgage life insurance?

Some lenders might ask you to take out a policy as a pre-condition before agreeing to lend you the money to buy your home, but there’s no law that requires you to do so. However, it can be a really good idea to give yourself some financial protection when making significant purchases like these, to avoid your loved ones inheriting your debt when you pass away.

As a mortgage is likely to be the largest debt you must pay in your lifetime, it could heavily burden your loved ones if they are left pay it in your absence. To avoid this, many choose a mortgage life insurance policy.

Designed to work in line with your current mortgage balance, your total cover amount decreases as you continue to pay off the capital and interest from your mortgage every month. So, as your mortgage balance drops, so does your total amount of cover. However, if you were to pass away within your policy term, your loved ones could receive this death benefit to either help pay off all or most of the balance. Therefore, you’re minimising or eradicating any debts they might inherit.

What you need to know about Mortgage Life Insurance

Important information to think about

When you first enquire about a life insurance policy, you’ll need to let providers know the total amount of cover you’d like.

If your sole reason for life insurance is to cover your mortgage, this should consider the amount you’re looking to borrow. However, your life insurance policy is yours, so if you want it to also cover any income you bring in or provide some security for your children, you can.

It's worth noting that your total amount should reflect the purpose you’ve taken a policy out for. It’s your loved ones that stand to inherit it when you pass away. So, if your mortgage is your largest concern, it should be at the forefront when you make any decisions.

Considering inflation, the length of your policy term, the type of policy you apply for and any changes that happen within your family, your total amount might not cover everything it needs to when you pass away. That’s why it’s important to carefully consider what purpose your life insurance needs to meet.

You may need separate policies if the mortgage term is different from the length of time you want to provide cover for family expenses. For example, a mortgage over 25 years and family cover until you’re 65 years old.

Is it possible to add critical illness cover to a mortgage life insurance policy?

Yes. In fact, it could offer you and your family more support, especially if you were to become terminally ill or suffer from a a specific list of critical life-limiting conditions or injuries. Under certain circumstances, you’ll be able to claim your policy early, providing your family with some financial stability during your illness.

It might also be worth considering income protection if at any point you fall ill or experience an accident that affects your ability to work and pay your monthly mortgage repayment. Both critical illness cover, and income protection will be able to keep you and your family afloat during times of need.

How much cover do you need on a mortgage life insurance policy?

Your policy should cover the remaining balance on your mortgage. Of course, this will depend on your house price, the deposit you put down and the type of mortgage you have. That’s why the amount of cover needed is different for everyone.

If you’re looking to take out mortgage life insurance cover, you’ll want to do two things. Firstly, you’ll want to ensure your total amount covers your current mortgage balance. Every time you pay off a piece of your mortgage, your death benefit will decrease in a similar way, but it’s worthwhile checking in with your provider each year to check this. Secondly, you’ll want to ensure your policy covers you for the same amount of time as your mortgage term.

If you move house, take additional mortgage borrowing or remortgage to a different lender your total death benefit may no longer match your balance. You may need to ensure you have adequate cover in place otherwise you could be overpaying for cover you don’t need. Alternatively, your death benefit might not cover the total amount owed. You might even have a policy that is too short or too long.

What happens when you’ve paid off your mortgage?

If you chose a decreasing cover policy, and you’ve chosen for your policy to last the same amount of time as your mortgage, then your cover should expire once your mortgage is fully paid.

However, if you repaid your mortgage early, the policy would continue until the end of your chosen term. If you find when you’ve repaid the mortgage you no longer need the life insurance, you could cancel it. However, bear in mind, if you do, you’ll no longer be covered, and usually with these types of insurance you won’t get anything back if you cancel it.

If you took out a whole of life, increasing, or level insurance policy, you may have other plans for your death benefit. In these cases, as they’re not directly connected to your mortgage, you’ll continue to pay them until you pass away, or your policy expires.

Do you still need life insurance even if you don’t have a mortgage?

There’s no rule about when you should and shouldn’t have life insurance, it just needs to be right for you at the time. Of course, you can get a mortgage without taking out life insurance cover, and you can also live your life without it entirely. However, the purpose of life insurance is to give you security and peace of mind, so it’s not worth writing off altogether.

Some mortgage lenders might ask you to take out a life insurance policy as a pre-condition before lending you the money for buying a house, but there’s no legal requirement for you to do so. If you do take out a policy, it provides a safety-net for your mortgage lenders, so that they know that the mortgage will be repaid if you unexpectedly pass away before you’ve fully repaid your mortgage.

Got questions about mortgage life insurance? Explore our FAQs

How do you know if you’re eligible?

Each provider might have a different set of criteria you’ll need to meet.

However, the following apply to LV=:

• You’re aged between 17 and 84 years old.
• You’re about to purchase a house, remortgage or release additional money against your current property.
• You’re planning to pay off your mortgage at a steady rate without any over or under-payments.

Your insurance provider might also want to check other terms and conditions with you as well. As mortgages are the highest debt, you’re likely to accumulate in your lifetime, they carry an element of risk for providers. Your overall risk factor will be considered as part of your monthly premiums. Normally, you’ll also be asked to confirm:

• Your total policy term, which with LV= could be between five and 50 years.
• The total amount of cover you want.
• Your general health, including pre-existing medical conditions.
• Any lifestyle choices, such as your smoker status.
• Information about you, including your age and where you live.
• That you’ve not committed fraud or another financial crime.

It’s important to be honest when you speak to a life insurance provider – and that goes for any other type of insurance too – as if you deliberately mislead, withhold or falsify information, you claim will not be paid, no premiums will be refunded, and your loved ones won’t receive your death benefit.

Can you take out a joint mortgage life insurance policy?

You can get either a single or joint life insurance policy to suit your circumstances. Typically, if you’re applying for a joint mortgage, you might also take out a joint mortgage life insurance policy. In many cases, a joint policy might be the best option and cheaper than two single policies. Your joint policy covers both of you, so if one of you passes away during the policy term, the payout will go to your partner on the policy, so they can pay off the remaining mortgage debt.

Does LV= offer life insurance for mortgages?

Yes. At LV=, we have decreasing life insurance policies that support those that have a capital and interest repayment mortgage. We also offer level term insurance policies too. If you need independent financial advice, LifeSearch, our preferred partner is able to offer you advice on protection products that might be right for you. Simply request a call back to get the ball rolling. After all, our policies start from just £5 (depending on your personal circumstances), giving you reassurance and peace of mind.

Does it affect your mortgage interest rates?

Taking out a life insurance policy for your mortgage, or any other reason, shouldn’t affect the interest rate you pay on it. It is worth noting that your mortgage interest rate could go up, meaning your total death benefit might not cover all of your outstanding balance.

Can you put it in trust?

Yes, it’s possible to do this. Your beneficiaries could also benefit from this too. With a life insurance policy in trust, any payouts can be made much quicker to your beneficiaries, meaning they’re able to repay the remaining balance of your mortgage sooner.

Without a policy in trust, it would payout to your estate, and this may mean your beneficiaries have to apply for probate. As this is a legal process it can take some time for your loved ones to receive their payout. At LV=, we typically aim to payout an insurance policy within three days once we’ve decided about your claim. However, if you need to apply for probate, we will need to wait for this process to be completed before we can pay a claim.

If a policy is held in a trust, it doesn’t usually form part of your estate, meaning the proceeds of the insurance policy can be paid out to your named trustees without the need for probate. This usually means that the proceeds can be paid to your beneficiaries by the trustees much quicker.

Looking for mortgage cover life insurance?

Taking out a mortgage can be a huge step. Fortunately, a mortgage life insurance policy could offer you and your loved one’s protection in case the unthinkable happens and you pass away.

At LV=, we've partnered with LifeSearch, who are available to offer you independent and no-judgement advice about your situation. Alternatively, if you'd like to discover more about the policies we offer, get in touch today.