Do you need life insurance when buying a house?

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

Why do people take out life insurance when buying a house?

A mortgage will be the biggest commitment most of us take on – it involves borrowing large sums of money running into tens and more likely hundreds of thousands of pounds. Yet if you unexpectedly die tomorrow, this substantial debt will be inherited by your surviving family or loved ones. This could become a significant burden or even force them to sell the property to cover the mortgage debt.

Life insurance is designed to pay out if you pass away during the term of the policy. The payout goes to your family, next of kin, or chosen beneficiaries. Amongst other things, the money can be used to pay off the outstanding mortgage so that your loved ones can remain in the same property avoiding further upheaval, and allowing the home to be passed on to others in the  future.

While mortgage approvals are generally not dependent on life insurance being in place, it can make homebuyers more attractive to lenders because it shows the additional responsibility taken.

Mortgage lenders or brokers may offer to arrange life insurance for you, but there is no obligation on your part, as you can buy life insurance from any provider.

Why should you buy life insurance with a mortgage?

There are many financial and practical reasons for buying life insurance with a mortgage. These include:

Enhanced financial protection

If you suddenly pass away, could your family or loved ones afford to pay the mortgage? The main purpose of life insurance when buying a property is to pay off the mortgage in full should the policyholder(s) die. This allows the deceased’s loved ones to remain in the same property mortgage-free without the added stress of keeping up with regular mortgage repayments.

Life insurance is not a legal requirement, and your mortgage provider won’t ask you to buy it. However, in some cases involving high-risk borrowers, lenders may recommend or require life insurance before making a mortgage offer. 

Greater peace of mind

Aside from the obvious financial benefits, life insurance provides policyholders with peace of mind should the worst happen, and they pass away. Buying life insurance gives your family or loved ones housing security and you the financial protection of knowing your family, dependents, or loved ones will be relieved of the burden of continuing paying mortgage repayments in the event of your death.

What types of life insurance are available when buying a house?

There are two primary types of life insurance used for mortgage protection:

• Level term life insurance
• Decreasing term life insurance

The type of life insurance you need depends on whether you have a repayment mortgage or an interest-only mortgage.

What is level term life insurance?

Level term life insurance allows the policyholder to determine the amount of payout their beneficiaries receive if they die. The payout stays the same and is typically enough to clear mortgage debts and could also be used to help towards ongoing costs such as household bills, education fees, medical care, funeral expenses, or the future financial needs of surviving dependents. Level term life insurance is most suitable for an interest-only mortgage where the interest is paid off, but the amount of outstanding loan stays the same throughout the mortgage term. There is usually some form of saving or investment plan in place designed to pay off the mortgage at the end of the term. 

What is decreasing term life insurance?

With decreasing term life insurance, the amount of payout decreases over time as your mortgage balance reduces. It is specifically designed to protect a repayment mortgage, where both interest and part of the outstanding mortgage amount (also known as ‘capital’) is paid off each month. The amount of money you’re covered for usually reduces in line with your mortgage debt. As decreasing term cover pays out less as time goes on, the monthly cost, or ‘premium’, is usually cheaper than level term cover.

What type of life insurance is best for me?

There is no straight answer, and the most suitable type of life insurance depends on your individual circumstances and financial needs. If you’re unsure of which type is best for you, it’s worth talking to your mortgage broker, or a financial adviser.

How much life insurance cover do I need when buying a house?

There are several key factors to consider when determining the correct amount of life insurance cover for your mortgage. These include the mortgage balance, interest rates, inflation, levels of income that would need replacing, and any other personal debts and financial commitments you may have.

Interest rates are of particular importance regarding life insurance cover based on replacing your income in the event of your death. With variable-rate mortgages, the interest rate can change which can influence the amount repaid to the lender each month . However, the interest rate and monthly repayment remains constant within a mortgage’s fixed-rate period.