Great news! You've found a house that you love, you've had your mortgage approved and your offer accepted! Now all that's left to do is sort the necessary insurances, while you wait to get the keys to your brand-new home! You may be wondering; do I need life insurance for a mortgage?
Insurance may be the last thing you think about amongst all the excitement of buying a new home, and you could find yourself confused about which insurances are compulsory and which are optional.
When you are buying a new home, it's not uncommon for your mortgage adviser to mention life insurance, but do you actually need it?
The main purpose of life insurance is to provide financial help to your dependents when you die and they can no longer rely on your income. It normally works by paying out a lump sum to your loved ones or those who are financially dependent on you, which they can use to pay off any debts, such as a mortgage.
So, if you have anyone who relies on you, such as a partner or children who couldn't manage the mortgage without your income, taking out a life insurance policy could give you peace of mind, knowing your loved ones would not be forced to sell the family home if you were no longer around.
Contrary to popular belief, having life insurance isn't compulsory when you take out a mortgage. In fact, the only insurance you need as a legal requirement when getting a mortgage is buildings insurance. Buildings insurance covers your home against structural damage, but not the contents or furnishings.
Lenders need to know that they can recover the value loaned to you should you be unable to repay your mortgage. If damage occurred to your property and you could not afford to pay for necessary repairs, the value of your house could decrease, leaving the lender potentially out of pocket. Buildings insurance offers insurers protection should this happen.
Although taking out a life insurance policy is not mandatory, taking out a mortgage is a huge financial commitment; therefore, life insurance should be considered if your loved ones would struggle to make the monthly mortgage repayments as well as the household bills in the event of your death.
While no one likes to think about death, it may be worth considering how your family would cope with the mortgage repayments if you were to die. If your family or dependents rely on your income, a life insurance policy can pay a lump sum to your loved ones, to help cover the cost of an outstanding mortgage, for example.
If you are purchasing a property on your own and have no children, have no one relying on you financially, and no one to leave your property to, life insurance may not be necessary for you, but you may want to consider critical illness cover. However, if you wish to leave your property to your parents, siblings or a friend after your death, life insurance could ensure that the mortgage is paid off first.
If you're buying your home with your partner, then it may be important to think about what might happen should you die after buying the property. If your partner does not earn enough to keep up with the mortgage repayments, they may be forced to sell up, and if you have children together, leaving the family home may cause a great deal of upheaval during an already difficult time.
A single parent
As a single parent, you may need to run your household on a single salary, so who would pay the mortgage if you were no longer there? Life insurance could provide you with the peace of mind that comes with knowing your children would be provided for when you're gone.
The sole breadwinner
If you're the main breadwinner in your household, your family may not be able to cope financially without your salary. Life insurance could help towards replacing this lost income should you pass away.
A stay-at-home parent
From housekeeper to taxi driver to cook, a stay at home parent has a pivotal role in the daily running of a household. If the worst were to happen to you, could your partner afford to reduce their working hours or give up work completely to take on these responsibilities or hire someone else to do them?
Life insurance covers a variety of different scenarios, so you need to ensure that you have chosen the right type of life insurance to suit your needs and circumstances. Here are three of the more common life insurance types:
Mortgage Protection Life Insurance
This is also sometimes referred to as decreasing term cover. The amount of cover reduces with this type of policy, roughly in line with a mortgage, assuming a fixed interest rate. If you pass away within the term of the policy, the pay-out is designed to cover the outstanding balance of your mortgage, allowing your loved ones to stay within the property without having to worry about covering mortgage repayments. Click on the link to find out more about mortgage protection life insurance.
Level Term Life Insurance
This type of life insurance aims to pay out an amount if you pass away at any time within the policy term. For instance, if you were to take out a level term policy for £100,000 for a period of 30 years, £100,000 would be paid out if you passed away at any time during that timeframe. Click on the link to find out more about level term life insurance.
Critical Illness Cover
Critical illness is an important type of insurance to consider. You need to think, if you became seriously ill and couldn't work, would your family be able to cope financially? This type of policy would pay out in the event of you being diagnosed with one of the critical illnesses specified in the policy within the policy term. You can choose to have this cover on a level or decreasing term basis. Click on the link to find out more about critical illness cover.
Critical illness cover is designed to provide you with a lump sum whilst you are alive whereas life cover is payable to your estate or loved ones when you pass away within the policy term.
If you do wish to go ahead and purchase a life insurance policy, you are not obliged to buy the policy from your mortgage advicer. Shopping around for life insurance from a comparison service such as Compare Cover, could help you to save money.
Are you planning to move into a new home? If so, you may be wondering, what is mortgage protection insurance? Find out more in our guide.
Have you bought life insurance through a bank? Discover why you may want to compare life insurance quotes to see if you can get a better deal.