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Do You Need Life Insurance to Buy a House?

Estimated reading time 7 minutes

Buying a house can be fraught with complications, delays and mountains of paperwork. Reducing those can be a godsend if it enables you to buy a home a lot faster. However, knowing what may be essential and what may not be needed can be tricky. One question often asked is about life insurance and whether it is needed to buy a home. For those new to home buying, it may sound slightly bizarre. Why would life insurance determine if you can buy a house? Well, it doesn’t and it’s not a legal requirement for you to have it either. You can buy a home without life insurance, but it can certainly have benefits if you have a policy.

In this edition of our blog, we look at why you may need or want, life insurance when you want to buy a home.

Is it a requirement to have life insurance when you buy a house?

No, it is not a legal requirement to have life insurance when buying a house, although lenders and advisors would tell you it’s probably a good idea. You, of course, may think they are just after some potential commission for suggesting an insurance provider but there's much more to it than that.

Taking out life insurance when you buy a home protects the lender and those who will remain living in the home after you pass away. With your contributions to the home no longer possible, the insurance policy takes care of the mortgage debt allowing your partner or family to remain living in the home.

Can you get a mortgage without life insurance?

Yes, and this has changed over the years. Up until fairly recently, a lender would not authorize a mortgage unless you had a life insurance plan in place.

If you don’t need a mortgage to buy a house, do you need life insurance?

If you are a cash house buyer, you, of course, have no debt attached to the home so a life insurance policy wouldn’t be used in the same way if you had a mortgaged property. That being said, life insurance would still be worthwhile helping out with other costs that may arise after your passing. Funeral costs, childcare costs, general family costs and other debts can all be covered with the funds paid out from a life insurance policy.

What are the different types of life insurance for mortgages?

There are a few different life insurance policy types you could take out to help protect your mortgage payments.

Mortgage life insurance

Specific mortgage life insurance comes in two forms. Decreasing term life insurance and level term life insurance.

The decreasing term life insurance policy sees its potential payout decrease over time as payments are made on the mortgage. This is often seen as a good choice for those with a repayment mortgage.

The level term life insurance policy is often chosen by those with an interest-only mortgage as the payout amount stays the same for the term of the policy.

Life insurance

You could opt for a standard life insurance policy that isn’t specifically for mortgages. These are available in similar formats to the mortgage life insurance policies where level, decreasing and increasing term policies are on offer.

Critical illness cover

Critical illness cover, whilst not a life insurance policy as such can act in much the same way as they do. Should you be forced to stop working through ill health, your policy may cover you and enable your mortgage to be paid off, giving you and your family time to focus on you.

How much will mortgage life insurance cost?

Much depends on your personal circumstances and the type of cover you choose. You’ll need to look at the mortgage balance, the interest rate, the mortgage term, any other debts you may have and inflation. Your policy costs will also be determined by your age, your general health, your income and your medical history. With all these factors taken into account, as well as whether the plan is a level or decreasing term plan, an insurance provider will be able to put together a quote.

It's recommended you get 3 or more quotes before settling on a policy as some may offer cheaper monthly payments than others and some may have particular features more beneficial to your needs.

The older you are the more expensive the policy will be when you take out a mortgage. For example, if you buy a home for £400,000 with a twenty-year mortgage at the age of 50, you could be paying more than £40 per month for your coverage. The same coverage for the same property when you are aged 20 can cost between £5-£7 per month.

How long should a mortgage life insurance policy last?

Your quote will be based on how long you want the coverage to last for and the value of the property as well as the other factors mentioned above. The longer the duration, the cheaper the monthly payments if taking the policy out at the same time as getting your mortgage.

You should look to get your life insurance policy aligned with your mortgage, if your mortgage is for thirty years, then your insurance policy should be for that length of time too.  Just remember, if you choose a set duration for your policy, and you live past it, there is no final payout, the policy simply ends, and you are no longer covered. If you have chosen a longer-term policy, you’ll remain covered until you pass away, are diagnosed with a terminal illness or the term reaches its natural end.

What insurance do I need for a mortgage?

In addition to life insurance, there is a selection of other policies that may be worth taking out.

Building insurance

Just like life insurance, buildings insurance is not a legal requirement for getting a mortgage, but it is often a requirement of lenders that you have a policy in place. This will cover you against things such as flood damage, subsidence, and other damage to the structure or permanent fixtures of the home.

Income protection insurance

If you suddenly find yourself out of work due to illness or injury, income protection insurance helps cover your costs. It is not needed but is often seen as a good option if you don’t have enough savings to help cover you whilst out of work.

Contents insurance

Simply, a policy that protects the contents of your home such as your appliances, mobile phone, and laptop. Repairs and replacements of the goods are covered.

Mortgage PPI

Mortgage payment protection insurance pays out in monthly instalments to help you cover mortgage payments when you are out of work due to redundancy or illness. Some policies cover the full mortgage amount, others cover a large percentage of the amount due each month.

If you haven’t got a life insurance policy in place but want to provide some additional financial comfort to your family, selling your home to Bettermove could be an option. We guarantee to sell your house fast enabling you to receive cash in your account within as little as seven days. This can then be used as you see fit, whether that be to buy a smaller property and provide your family with the leftover cash or give the entire sum to them whilst you move in with a partner or into care. With no fees or commission, we sell your house for free meaning the amount we offer is the amount you get. Why not contact our team today to find out more?