No-one wants to think about bad things happening, but sometimes they do.
Because buying a home is such a big financial commitment, it’s important to have a plan in place to pay the mortgage if you lose your job, you’re too ill to work or you die.
A common question buyers ask is, do you need life insurance for a mortgage? No, you don’t.
Unlike buildings insurance, which mortgage lenders insist you take out, mortgage insurance is not mandatory. But it’s no less important.
If you or your family suffers a loss of income that means you can’t keep up with the mortgage payments you’ll either have to sell your home while coping with grief or ill health, or it could be repossessed.
Sounds gloomy doesn’t it? But once your cover is in place, you have peace of mind that your family are financially protected if the worst does happen, leaving you to get on with enjoying your new home for years to come.
There are lots of different policies you can choose to protect your mortgage payments which can be adapted to your budget. We know that this can feel overwhelming for first-time buyers and movers alike, so we put together this handy guide to help you decide what’s right for you.
If you die within the term of your policy, a person of your choosing receives a tax-free lump sum pay out. The money could be used to repay the outstanding mortgage balance, pay household bills, cover your funeral costs or to provide your beneficiaries with a comfortable life.
The two main types are:
Level term life cover – this policy pays out a fixed lump sum if you die within the term of the policy. If you die after the policy has ended, you receive nothing. The sum you’ll receive and your premiums remain the same throughout the life of the policy with the guaranteed price policies that we recommend.
Premium is insurance-speak for the monthly cost of your policy.
Decreasing term life cover – you also receive a lump sum if you die before the policy expires but the value of the insurance decreases over time roughly in line with the rate at which your repayment mortgage decreases. If you took out a mortgage of £100,000 to buy your home your decreasing term life cover would start at £100,000. If after making monthly repayments for five years your mortgage has reduced to £85,000 your life insurance would have fallen to a similar amount.
When you die, the value of the cover should be enough to repay the outstanding mortgage balance.
If you increase the size of your mortgage, move on to a higher interest rate or extend your mortgage term, your life cover needs to be reviewed.
Taking out a policy each means you can choose different levels of cover. The main breadwinner can insure themselves for more and pay a higher premium. The other benefit (although not nice to think about) is that If you split up in the future, you both have your own policies.
Taking out a joint policy can be cheaper than taking out two separate policies. You’ll need to choose if you want the insurance to pay out on the first or second death of the policy holders.
If it’s paid out after the first death, there is no remaining cover in place. If the surviving partner then applies for life cover the cost will have risen because they are older. If you split up, you’ll need to speak to the insurer to see if they will split the policy, which may result in higher premiums.
The average cost of a single, level term life policy for between £150,000 to £200,000 for an 18 to 29-year-old is £17*.
If you don’t have financial dependents or do not wish to leave behind a lump sum on your death you don’t need life cover. Your home will be sold when you die to clear the mortgage.
You may already have a death in service benefit with your employer ,which does the same job as level term life cover. If you die while you’re an employee your nominated beneficiary gets a lump sum pay out which can be up to five times your salary. Check with your HR team or your contract to see if this policy is in place. It’s also worth considering that if you move jobs, you won’t carry that cover with you. In general life cover becomes more expensive the older you are, so if you have a death in service benefit don’t use it as an excuse to kick the can down the road for a few years.
Critical Illness Cover (CIC) pays out a tax-free lump sum when you’re diagnosed with a qualifying critical illness within the term of the policy. The list of illnesses covered depends on the individual insurer, some have up to 50. The core illnesses covered by all policies are; some cancers, heart attacks and strokes.
As treatments have advanced, survival rates of critical illnesses have improved. Statistics from Pacific Life Re show that a 40-year-old non-smoking male has a 3% chance of dying before he turns 65 but a 14% chance of being diagnosed with a critical illness.
If you’ve got CIC cover and receive a diagnosis of a serious medical condition, it’s you who receives the lump sum not your family. You can use the money to repay your mortgage, pay for time off work or private treatments, leaving you to focus on your recovery.
You can buy life and critical illness cover bundled together.
Taking out CIC as well as a life policy means you’ll receive a tax-free lump sum when you’re diagnosed, and another pay out when you die if your death occurs within the term of the policy.
Combined cover is different. It pays out just once either on diagnosis or death.
Like joint life cover, joint CIC pays out a lump sum just once usually on the diagnosis of the death of the first person.
The average cost of a single, level term life policy with additional CIC cover for £150,000 to £200,000 for an 18 to 29-year old costs £46*.
Instead of a one-off lump sum pay out that could be used to repay your mortgage, you can insure your monthly income instead. Depending on the type of policy, you can pay a premium to receive 50 or 70% of your monthly earnings tax free – note that there is usually a cap of around £2,500 per month. You can set your level of cover to provide the minimum amount of cash needed to settle your monthly bills or increase your cover if you’re happy to spend more on the premium.
Usually, you’ll set your cover to kick in after your sick pay expires so check your contract. The longer you wait between being signed off work and receiving your premiums the cheaper it is.
Income protection will cover you if you are injured or too ill to work. You can receive up to 70% of your pre-tax income for as long as you’re unable to work. It will keep paying you until your retirement if necessary.
**A 25-year-old, non-smoking office worker taking a 25-year income protection policy would pay around £7 a month to receive a tax-free monthly payment of £700 after a three-month deferment period.
Self-employed income protection is also available. Your premium will be affected by the type of job you do, your age and pre-existing medical conditions.
A common question our mortgage experts are asked is, does income protection cover redundancy? It doesn’t. But here’s a policy that does.
Take out this policy, and you’ll receive a monthly benefit if you can’t work because you’re injured, fall ill or you become unemployed through no fault of your own. Policies provide up to 50% of your salary for 12 to 24 months. This policy often does not cover you if you’re taking time off for stress, anxiety or back pain.
***The average cost of an ASU policy is around £20 a month.
Ian Sawyer, director at broker Assured Futures, says: ‘An important distinction between a short-term policy like ASU and long-term policies such as life, critical illness and income protection is that ASU insurers could increase your premium or withdraw parts of your cover by just giving you 30 days' notice. Short term cover is typically cheaper and quicker to arrange, but when you take out long-term mortgage protection your premiums are fixed unless the customer changes them.’
There is no specific first-time buyer life insurance. However, because first-time buyers tend to be the youngest buyers in the market they certainly benefit from the cheapest premiums.
Smokers’ premiums will be approximately double that of a non-smoker.
*An 18 to 29-year-old can expect to pay approximately £17 a month for £150,000 to £200,000 of life cover compared to £68 for a 50 to 59-year-old.
At Tembo, our brokers will start a conversation around your protection needs as early as your first call with them. This means that you can factor protection into your affordability and monthly budget, and there won’t be any surprises further down the line.
Once your application has been submitted, you’ll already have been given options that fit your budget, and you can look to take out the policy at the same time that you take out buildings and contents insurance. Meaning that it will become part of your regular monthly household bills and will protect you and your family’s financial security from the outset.
An Income Boost or JBSP mortgage is where family members join you on the mortgage to boost your buying power but are not registered as owners of the property.
All parties to a joint borrower sole proprietor (JBSP) mortgage should have some form of mortgage protection because everyone named on the application is equally liable for the payments.
In reality, your parents may never contribute to your monthly mortgage payment. But if you or your partner are unable to pay for a number of months or one or both of you passes away the responsibility for the mortgage payments would fall squarely with them.
Instead of googling ‘budget life insurance uk’ speak to one of our mortgage experts or check out a price comparison site. You’ll still get the option to check out the premiums on budget plans or upgrade to more comprehensive cover that can be tailored to meet your specific needs.
*Source: Moneysupermarket.com prices from between July and December 2020.
** Source: LifeSearch February 2022
*** Assured Futures February 2022