Life Insurance for a Mortgage: How Much Cover Do You Need?

Buying a home usually means taking on the largest debt of your life. Life insurance for a mortgage is designed to pay out if you die during the policy term, so the people you live with are not left to meet the repayments alone. This guide explains the main types of cover, how to match a policy to your mortgage and when to review it.

Do you need life insurance to get a mortgage?

Most residential lenders do not make life insurance a condition of the mortgage. However, if a partner, children or other family members rely on your income or live in the property, it is worth thinking about how the mortgage would be repaid if you died. Without cover, they may need to rely on savings, sell the home or take on payments they cannot afford.

If you live alone and no one depends on you, life cover may be less of a priority, although you may still want to consider protection that supports you if you are ill, such as income protection or critical illness cover.

Decreasing term or level term?

There are two common ways to structure mortgage life cover.

Decreasing term life insurance

With decreasing term cover, the amount paid out reduces over the policy term, broadly in line with a repayment mortgage balance. Because the sum assured falls, premiums are usually lower than for level cover. It is designed for capital and interest (repayment) mortgages. Check the interest rate the policy assumes: if your mortgage rate is higher, your balance could reduce more slowly than the cover.

Level term life insurance

Level term cover pays the same fixed amount whenever a valid claim is made during the term. It is often used for interest-only mortgages, where the balance does not reduce, or where you want the payout to clear the mortgage and leave an additional sum for your family. Some policies offer increasing cover linked to inflation, which helps protect the value of the payout over time.

How much cover and for how long?

A sensible starting point is the outstanding mortgage balance and the remaining mortgage term. From there, think about:

• other debts, such as loans or car finance, that would need to be repaid;

• day-to-day living costs for your family, including childcare;

• any death-in-service benefit from your employer, remembering it usually ends if you leave that job;

• savings and investments that could be used;

• how long your children are likely to be financially dependent on you.

Matching the policy term to your mortgage term keeps the cover aligned with the debt. If you remortgage, extend your term or borrow more, check whether your existing policy still fits.

Joint or single policies?

Couples buying together can choose a joint life policy or two single policies. A joint policy usually pays out once, on the first death, and then ends. Two single policies typically cost a little more, but each pays out separately. If both partners died during the term there could be two payouts, and the surviving partner keeps their own cover after a claim. The right choice depends on your budget and what you want the cover to do.

Writing your policy in trust

Placing a life insurance policy in trust lets you decide who receives the payout. It can mean the money reaches your beneficiaries without waiting for probate, and in many cases the payout may sit outside your estate for inheritance tax purposes. Trusts have legal consequences and are not right for everyone, so take advice first. Our page on putting a policy in trust explains more.

What affects the cost of cover?

Premiums depend on the amount and length of cover, your age, your health and medical history, whether you smoke or use nicotine products, your occupation and some hobbies. Answer the application questions fully and accurately, because non-disclosure can lead to a claim being reduced or declined.

Cover is usually cheaper the younger and healthier you are when you take it out, so many people arrange protection at the same time as their mortgage.

When to review your life insurance

• when you buy your first home or move house;

• when you remortgage, borrow more or change your mortgage term;

• after marriage, separation or divorce;

• when you have a child;

• when you change jobs and your employer benefits change.

If you are buying out a partner after separation, our guide to buying out a partner covers the mortgage side.

Life insurance and other protection

Life insurance pays out on death and, with many policies, on diagnosis of a terminal illness. Long-term illness or injury can also affect your ability to pay the mortgage, so it is worth looking at income protection and critical illness cover alongside it. Our guide to life insurance, critical illness cover and income protection compares the three.

Talk to PMS Mortgages

We can review your mortgage and your existing cover together and explain the options. PMS Mortgages advises clients in Croydon, Purley, Surrey and across the UK from Airport House, Purley Way, Croydon, as well as by phone and Zoom. Read more about life insurance advice or book a consultation.

Further reading

MoneyHelper: what is life insurance?

General information, not a personal recommendation. Cover is subject to the insurer’s underwriting, terms, conditions and exclusions. PMS Mortgages will explain any advice fee before you proceed.

Trust and inheritance tax advice are not regulated by the Financial Conduct Authority. We do not provide tax advice, so take specialist advice where needed.