Is Life Insurance Necessary For A Mortgage?
Protection For The Future
It’s said that buying a house is one of life’s most stressful experiences. From securing a mortgage and exchanging contracts to packing your belongings and arranging removal services, there is so much to do and think about. One of the most important aspects of buying a new home if you’re securing a mortgage, however, is considering how you or your loved ones will continue to make your repayments in the event of your untimely death, or if your income falls, you become unemployed, or you or your partner become seriously ill.
However, there is often confusion among first time buyers about what exactly is required in order to protect your mortgage payments. Questions such as, ‘do I need to take out life insurance in order to secure a mortgage?’ and ‘what is mortgage protection insurance?’ are common. With this in mind, to give you a better understanding of what is legally required and what is good practice in terms of mortgage payment and life insurance, here at Chill we have put together this handy guide.
Do I Need Life Insurance To Buy A House?
To put it simply, no, you do not need to purchase a life insurance policy in order to purchase a house. However, if you are purchasing a property with the help of a mortgage, most providers will typically require you to take out a mortgage protection insurance policy before lending you the money for your new home. While we will discuss these policies in more detail later in this blog, it is important to note that although they share some similarities, mortgage protection policies and life insurance are not the same thing, and this is where first time buyers can easily become confused.
The term ‘life insurance’ is an umbrella term that is used to describe an array of different insurance policies. In its most basic form, life insurance is designed to provide a tax-free lump sum to your next of kin/dependents if you (the policy holder) die during the term of the policy. Types of life insurance policy typically on offer include, income protection, life long insurance, term life insurance, pension insurance, serious illness cover, and mortgage protection.
With the exception of mortgage protection insurance, most types of life insurance are not a necessary requirement when it comes to taking out a mortgage. This is simply because, unlike specific mortgage cover, in the event of a claim on a family member’s life insurance policy, the funds provided can be used for anything, from replacing the policy-holder's income to ensuring the next of kin can pay their day-to-day expenses and future healthcare and education costs. These policies therefore don’t necessarily ensure your bank/mortgage provider will be able to recoup the money they lent.
What Is Mortgage Protection Insurance?
Typically compulsory under Section 126 of the Consumer Credit Act 1995, unlike more general life insurance policies, mortgage protection insurance is a specific type of life cover which, if successfully claimed, provides a one-off lump sum that must be used to pay off any outstanding balance on your mortgage should you or a joint borrower die before the mortgage is fully repaid.
Mortgage protection cover should be in both names if there is more than one person named on your mortgage, working on a first death payout basis. This is to say, if you or anyone else named on a mortgage dies before the mortgage is repaid, the insurance will pay out to the joint-policy holder. It’s also important to remember that if you decide to review your mortgage or even remortgage your property, additional cover will likely be needed. Finally, if you go into mortgage arrears, your mortgage protection insurance policy may be void.
There are a few exceptions to this rule. For example, you may not have to take out mortgage protection insurance if you are:
- Aged over 50.
- Securing a mortgage for a second home that is not your primary residence.
- Your provider is satisfied that your next of kin have enough life insurance to pay off the home loan, as well as other future expenses, if you die.
- You cannot get insurance, or you can only find policies at a much higher premium than normal. (You may need to provide quotes to your provider to prove this).
While you will generally be required to take out mortgage protection insurance to secure your mortgage, it’s important to note that you are not obligated to purchase this cover from the same lender who is providing your mortgage. It is generally considered good practice to shop around and find the best policy to suit your own needs and budget.
Do I Need Both Life Insurance And Mortgage Protection?
While you certainly don’t require both life and mortgage protection insurance policies in order to secure a mortgage, many mortgage holders do opt for both for additional protection for their family. This is particularly common for those with younger families who want to ensure their loved ones don’t have to worry about paying the mortgage off, thanks to their mortgage protection insurance, or the day-to-day and future living expenses, due to a lump sum life insurance payment, in the event of your early death. With both your family's accommodation and lifestyle protected, there is no doubt having both types of cover is appealing.
But remember - if you are wondering which type of insurance to prioritise, or if you are not in a position to afford both, mortgage protection should be your focus. Having this cover in place is pivotal in securing a mortgage agreement and can be the difference between you being able to purchase your dream home and missing out.