Is it worth having life insurance on a UK mortgage?

Lenders in the UK do not generally require customers to havelife insurance, and it is an individual borrower’s decision to purchase it. It is up to you whether you decide to have a policy, although a wise mortgage adviser will of course recommend it. On the one hand, life insurance gives your family financial security in the event of your death. On the other hand, however, you have to pay the premiums. In this article, we’ll try to answer the title question by deciding whether it’s worth having a life insurance policy when paying off your mortgage in the UK.

Do banks offer better mortgages if you have life insurance?

**Not really. **The vast majority of lenders in the UK do not interfere with their clients’ insurance decisions at the decision in principle stage. Nor is there any legislation that mandates insurance.

According to Lloyds Bank, the purchase of insurance is not a condition of the mortgage agreement, or at least we have never encountered this type of provision in contracts. The life insurance policy is an additional security for the bank which, in theory, should lower the interest rate, but due to the shape of current regulations, the lenders’ risk is quite low anyway.

Banks do not have to insist on life insurance policies because mortgages are usually taken out by couples, not just one person. As a result, even if one borrower dies, the other is still obliged to pay the instalments. The house itself is secured by a mortgage, so if there are problems, the bank will simply be able to take it away. The only policy required is usually property insurance.

In summary, we can conclude that most credit advisors will recommend you take out life insurance, but no bank will require you to produce a policy. For the sake of argument, let us also add that insurance premiums reduce your affordability - it is, after all, an additional financial commitment!

Why is it worth having life insurance?

As we have already mentioned, buying life insurance is a matter of common sense and no one will force you to do so.

**Life insurance is designed to provide financial security for your family when you die. **In the case of a mortgage, the idea behind the policy is to pay out funds that will allow your loved ones to pay off your obligation. This is, of course, to prevent eviction, which could occur if there is a prolonged delay in paying instalments.

Buying life insurance is particularly recommended when:

• Your partner is unable to repay your mortgage on his/her own;

• You have dependent children, a partner or your parents;

• The amount of your savings is small compared to the remaining mortgage balance;

• You have taken out a mortgage with an LTV of 90% or 95%.

The more your family relies on your work, the more important it becomes to purchase a life insurance policy. Remember that dying may not only lead to the eviction of your loved ones - any debts also pass to your estate. Life insurance will not protect you from an early death, but it can protect your family from the spectre of bankruptcy.

What insurances do I have to choose from?

We can basically specify two types of life insurance policies:

Term life insurance policy

Term life insurance is the most classic policy you can imagine - you take out a policy for, say, 20 years, paying a set premium over that time. The sum insured, i.e. the amount of the potential benefit for your family, is set top-down and, as a rule, does not change.

When you choose a term policy, by paying off each instalment of the mortgage you increase the difference between the amount of the benefit and the balance of the debt. In effect, you are leaving behind a “legacy” of sorts. However, this comes at the cost of higher premiums.

Decreasing life insurance - policy for mortgage holders

It is worth mentioning an interesting product that is still not overly known in the UK market. Decreasing life insurance, also known as mortgage life insurance or mortgage insurance.

The idea behind this policy is simple - by taking out a repayment mortgage, you reduce your outstanding balance from month to month. Therefore, you don’t need the same protection throughout the repayment period - it can decrease. In exchange for a shrinking sum insured, your premiums also fall over time.

Decreasing life insurance is a great option for people who are raising money themselves for the future and want to keep premiums to a minimum. It’s worth considering this product if you’re young - you’ll pay very little and won’t expose your family to financial problems in the event of a serious accident.

Are there situations where it is not worth buying life insurance?

There are scenarios where it is worth considering the cost-effectiveness of life insurance - sometimes it can be unnecessary or unaffordable, even if we have a family and a mortgage. What are these situations?

You have big savings

If you have enough savings that an emergency mortgage repayment in the event of your death would be possible, having a life insurance policy is not that necessary. Of course, few people have £250,000 in their bank account, but those with three, five or seven years left to repay have relatively little to repay. Let’s illustrate this with the example of a model repayment schedule for a £250,000 mortgage:

Year: Outstanding: 0 (start) £250,000 3 £235,809 6 £218,828 9 £198,506 12 £174,188 15 £145,086 20 £83,317 23 £36,343 The value of the mortgage is £250,000 and the interest rate is 6%. Repayment has been spread over 25 years. The calculations are for illustrative purposes only and were obtained using the calculator on the Moneyhelper website.

As can be seen from the previous example, you may pay back more in the last 5 years of the contract than in the first 12. This is of course due to the way interest is calculated. It is for this reason that we recommend to our clients that they take out insurance in the first few years of repayment in particular.

Having savings greater than your mortgage balance does not immediately make life insurance meaningless. Its non-possession is simply not as unreasonable as having no money for a black hour.

You have a high BMI, have a risky profession and smoke

As controversial and paradoxical as it may sound, being at risk is not always worth getting insurance. With a BMI of 40 or higher, you are at critical risk of a myriad of illnesses, including heart attack or stroke. Therefore, the availability of insurance is very low for you and the potential premiums will even be astronomically high.

Cigarette smokers are also in a predicament - their insurance premiums can sometimes be three times higher. Although, as a smoker, you don’t have to worry about the availability of life insurance policies, their cost can be a deterrent, and when you consider that** insurance companies don’t differentiate between people who smoke one cartridge of tobacco warmer a day and those who smoke five packets a week**, the situation gets even worse. Risk assessment algorithms may simply put you in a slightly less favourable position.

In circumstances where the proposed insurance premiums are too high for you, it is worth considering a lifestyle change and temporarily purchasing a policy for a smaller amount. After all, it is better to be insured for £20,000 than not at all.

You and your partner earn very well

Some people claim that the rich don’t need insurance. While this statement is debatable, you can actually see that having an insurance policy is more important the more vulnerable your financial situation is.

If you and your partner earn above average and the mortgage instalment is a small part of your income, a life insurance policy is less important. However, it is worth bearing in mind that you should suggest the financial situation of the person whose income is lower. If one of you would not be able to pay the instalments alone, it is worth thinking about insurance.

You have no heirs or family

Although single people are a very small group of our clients, they are worth mentioning.

With no family or partner, you don’t have to worry about what will happen to your mortgage in the event of your untimely death - the bank will take over the property anyway. However, being in such a living situation, you should consider purchasing Critical illness cover, which will pay out if you become ill with any of the specified critical illnesses. Loss of income insurance is also a good product for single people - it works in a similar way to benefits, paying out up to 70% of your income if you lose your ability to work.

Take credit at a late age and enjoy good health

Life insurance for young people is generally a very cheap product - it is not uncommon to find monthly premiums hovering around £10-£15 for a really decent level of protection. Indeed, our calculations show that a non-smoking 30-year-old can take out 20-year insurance for £300,000 for just £9 a month.

A non-smoking 50-year-old will also be able to take out £300,000 of life insurance, but their premium will already be £47. When the same person decides to take out life insurance 5 years later, the cost will already jump to £80 per month. What will happen after another 5 years? The insurance will cost £148.

Rising property pricesin the UK and increasing life expectancy mean that many people are opting for credit in their 40s or even 50s. Their earnings often allow them to pay off their home in 15-20 years, and the credit score of these customers is often very high. Insurance companies look at these people differently to banks - after all, the risk of developing cancer, heart attack or stroke increases with each passing year. Even athletes who take care of themselves can die prematurely.

If you decide to take out a mortgage when you are over 45, consider regular overpayment or, alternatively, remortgage, which may prove to be a more effective tool for achieving financial freedom.

Summary

Don’t get us wrong - life insurance is a very useful tool that every borrower should consider. Our post was just to make you aware that everyone’s situation is slightly different and we don’t all need a life insurance policy to the same extent.

Want to find out how much life insurance costs for you and your family? Get in touch with us. Our insurance consultations are** free **and talking to an agent does not commit you to anything.