Legally, you don’t need to have life insurance to take out a mortgage. However, this doesn’t mean you should ignore the idea altogether.
Why would you need it?
The purpose of life insurance is to help your partner, children or other dependants cope financially if you die. Your life insurance could be used to pay off some or all of your mortgage. Without life insurance, however, your family could be left with financial difficulties.
So, if you have anyone who relies on you financially to afford your home, like a partner or children, taking out a life insurance policy can give you peace of mind.
How much does it cost?
The cost of a life insurance policy can vary, depending on a number of different factors, including the type of policy you take out, the amount of cover, the term of the policy, your age, weight, lifestyle, medical history, occupation and so on.
For example, a young, healthy person would pay less for life insurance than someone older, or someone who suffers from certain ongoing medical conditions.
As with anything, it’s always a good idea to shop around for the best deal. Or perhaps consider speaking to an independent mortgage or financial adviser if you want impartial advice.
What options do you have?
There are two main types of life insurance you can choose between, whole-of-life insurance and term life insurance.
A whole-of-life policy will pay out no matter when you die, providing you have made all of your necessary payments, and it contains an element of investment so can provide a return of some of your premiums if you cancel your policy. On the other hand, a term life insurance policy will run for a fixed period of time, usually set up to match the term of your mortgage repayment. After this period is up, the cover ends and there is no lump sum payable at the end of the term.
There are three different types of term life insurance: level term insurance, decreasing term insurance and increasing term insurance.
A level term policy will pay out the same amount of benefit throughout the entire term. In contrast, with a decreasing term policy, the potential pay-out will reduce over time, to match the outstanding balance left on your mortgage. Finally, with an increasing term policy, the pay-out will rise over time to stay in line with the cost of living, but so will the necessary payments. If budget is a concern in the early days then this could be a solution to still provide you with cover.
What about illness or injury?
Life insurance only covers the worst-case scenario, so wouldn’t provide a pay-out if you became critically ill or seriously injured. You do have other options, however. Income protection insurance will provide regular payments if you’re unable to work due to illness or injury, while critical illness insurance will provide a lump sum payment if you’re diagnosed with a serious illness.
Alternatively, Mortgage Payment Protection Insurance (MPPI) covers the cost of your mortgage repayments if you become unemployed, including as a result of an accident or illness. Most MPPI policies only cover your mortgage costs for up to a year and are pre-capped at a fixed value or percentage of your salary. However, these policies are tax free and unlikely to affect any state benefits you might receive, and can relieve some financial pressure during an already stressful time.
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