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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.

What is mortgage life insurance?

Mortgage life insurance, also known as decreasing life insurance, is designed to help cover the remaining balance on your repayment mortgage if you pass away during the policy term.

When you first take out your policy, the amount of cover usually matches your mortgage balance. As you continue making repayments over time, the amount of cover provided by the policy decreases in a similar way to your outstanding mortgage debt.

How does mortgage life insurance work?

When you take out mortgage life insurance, you choose a level of cover and a policy term that usually matches your mortgage. If you pass away during that time, your loved ones could receive a payout to help repay some or all of the remaining mortgage balance.

Most mortgage life insurance policies are based on decreasing cover. This means the amount of cover reduces over time, broadly in line with your repayment mortgage balance as you continue making monthly repayments.

Because the payout decreases over time, mortgage life insurance is often cheaper than other types of life insurance, such as level term cover. However, if you have an interest-only mortgage, level cover may be more suitable as the amount owed does not usually reduce during the mortgage term.

How much does mortgage life insurance 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.

Is mortgage life insurance right for you?

Mortgage life insurance can help protect your loved ones from outstanding mortgage debt if you pass away during the policy term. However, whether it’s right for you will depend on your mortgage type, financial situation and the level of cover you need.

Here are some factors worth considering:

What are the different types of mortgage life insurance?

The right option for you will usually depend on the type of mortgage you have, how much cover you need and whether you want your policy to protect more than just your mortgage balance.

Before choosing, there are typically four types of life cover for mortgages. These include:

Decreasing cover

Decreasing cover is the most common type of mortgage life insurance for repayment mortgages. The amount you’re insured for decreases over time, usually in line with your outstanding mortgage balance as you continue making repayments. Your monthly premiums typically stay the same throughout the policy term and are often lower than level cover policies.

Level cover

Level cover provides a fixed amount of life insurance cover throughout the policy term. Unlike decreasing mortgage life insurance, the payout does not reduce over time. This type of life insurance is often used for interest-only mortgages or by homeowners who want mortgage protection alongside additional financial support for their family.

Increasing cover

Increasing cover is designed to help protect the value of your life insurance against inflation. Your level of cover increases over time, either by a fixed percentage or in line with inflation, and your premiums will usually increase too. This type of mortgage life insurance may suit those wanting longer-term financial protection beyond their remaining mortgage balance.

This type of cover is not usually used to cover a mortgage debt.

Whole of life

Whole of life cover provides lifelong life insurance protection rather than cover for a fixed mortgage term. As long as premiums are maintained, the policy will pay out when you pass away. Although whole of life insurance is not typically used specifically for mortgage life insurance, it can still help loved ones cover outstanding mortgage costs if needed.

This type of cover is not usually used to cover a mortgage debt.

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.

How much mortgage life insurance cover do you need?

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 considering mortgage life insurance, you’ll want to do two things. Firstly, you’ll want to ensure your total amount covers your current mortgage balance. As you continue paying off 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 mortgage life insurance cover may no longer match your remaining mortgage 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 to mortgage life insurance when your mortgage is paid off?

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.

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.

Got questions about mortgage life insurance? Explore our FAQs

Find all answers to any questions you have about mortgage life insurance below.

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. 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.

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.

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 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.