How much mortgage life cover do you need?
The amount of cover you take out should match the amount you owe on your mortgage. As everyone’s mortgage is different, the amount you need is specific to you.
The amount your policy pays out over time, so you should check that it goes down at the same rate as your mortgage. Take out too little cover, and your payout might not be enough to clear your mortgage if you die.
Taking out too much cover is also a possibility. Do this and you could be paying more in premiums than you need to be.
Bear in mind that if you extend your mortgage, or increase the amount you borrow, you should update your policy to ensure it covers your new mortgage. Get in touch with your insurer if this is the case.
The best way to get a policy that works for you is to tie your cover amount to the amount you owe on your mortgage. You can check your latest mortgage statement, or speak to your lender to get the most recent balance on your mortgage
Do you have to pay tax on your mortgage life insurance pay-out?
Your life insurance payout forms part of your estate. This is the sum total of everything you leave behind after you die.
If the value of your estate is less than £325,000, your beneficiaries pay no tax on it. If your estate, including your payout, exceeds £325,000, they have to pay 40% inheritance tax on anything above that threshold.
There are legal ways to avoid this. Writing life insurance in trust allows you to keep your pay-out separate to your estate. This way, your beneficiaries get the full amount tax-free, even if your estate still exceeds £325,000.
This could be worth considering if your mortgage exceeds £325,000. If your pay-out is over the threshold, it might not be enough life insurance to cover your mortgage after tax. Putting your policy into a trust may be a smart way to ensure they get the full amount.
What our life insurance expert says
Mortgage life insurance can be a great way to ensure your family can keep your home if you pass away. Just make sure to take out the right amount of cover so that your pay-out drops in line with your mortgage, otherwise you could be paying more in premiums than you need to be.
Life insurance expert
Need more help?
No, these are different policies. Mortgage life insurance gives a lump sum to pay off your mortgage in full if you die. Mortgage protection insurance covers your mortgage repayments for a short time if you’re too ill to work or if you lose your job.
Most mortgage protection insurance policies pay out for a maximum of a year. This could help you stay afloat if you’re ill and need time to recover, or while you’re looking for a new job. But mortgage insurance is designed to clear your mortgage entirely after you’re gone. This ensures your family aren’t left with a large amount of debt that they can’t afford and prevents them needing to sell your home.
Joint life insurance policies cover two people at once, so if either of you die, your beneficiaries get a pay-out. After that, your policy ends.
This could be useful if you have a mortgage together, as it lets your family pay off the debt if one of you passes away.
The downside is that joint policies only pay out once. If you both die at the same time, your beneficiaries only get a single payout. This might be enough to cover the mortgage, but it might not be enough to cover other things, such as:
- Other debts e.g. credit cards, personal loans, car finance agreements
- Funeral costs
- Financial support for your children and loved ones after you’re gone
You could secure yourself against this by taking out two policies - a joint mortgage life insurance policy, and a second joint life insurance policy, for example. That way your payouts cover both your mortgage, and the outgoings your family would need to keep living comfortably.
If you’re simply looking to make sure your mortgage is covered, though, then a joint mortgage life insurance policy could be worth considering.
Just be aware that if you separate from your partner and decide to terminate your policy, you won’t get back what you’ve paid in premiums.
Anyone over 18 can be part of a joint life insurance policy. They don’t need to be a spouse or relative, but you do need to share the same address.. Joint mortgage life cover is usually more expensive than single life insurance policies as you’re covering two lives at once. But it’s usually cheaper than taking out separate policies for each person.
Yes you can. If you’re the only policyholder and your marriage ends you can keep paying your mortgage life insurance premiums and to stay covered
If you have a joint policy, you should be able to remove the second policyholder and continue with a single person policy. Your monthly payments are likely to change, so get in touch with your insurer to see what they can offer you.
The same is true if you move home. You should be able to keep your existing policy but tweak it to better suit your new situation. Calling your insurer is the easiest way to see what your options are. Or try our guide on how to change your life insurance policy for tips on what to look out for.
Most policies cover you if you die due to illness or an accident. But there are a few situations where your mortgage life cover might not pay out.
These can include death as result of:
- Drug or alcohol abuse
- A reckless act
Failing to pay your premiums could also deprive you of a payout. Miss too many, and your policy could be terminated. You’d then lose everything you’d paid so far and might not get a payout if you died. Most policies have a grace period in which to pay, though, so if you do miss a payment, you might be able to make up that balance and keep your cover. If you’re struggling to meet your monthly payments, it’s best to get in touch with your life insurance provider before things get that far.
Many life insurance policies pay out if you’re diagnosed with a terminal condition. If the condition is included in your policy details, you should be able to claim for the full amount while you’re still alive. You can then use it to pay off your mortgage before you die, making your remaining time a little easier for you and your family.
Generally, an illness is terminal when it can’t be cured and it limits your life expectancy to 12 months or less. Some insurers might have a different definition of what a terminal illness is, however, so it’s worth checking with them before you take out a policy.
Terminal illness cover is free of charge. This is different to critical illness cover, which is an add-on to your life insurance policy that comes at an extra cost.
Some insurers might ask you to have a medical examination before they offer you cover. Whether you’re asked to have one depends on a range of factors, including your:
- Lifestyle habits
- Family medical history
Let’s say you’re a fit, non-smoking 30-year-old with no pre-existing medical conditions. You’re less likely to be asked to have a medical than someone older with a more complicated medical history, or who’s smoked their whole adult life..
The point of a medical is to assess your general state of health. This helps insurers determine your risk of dying during the term of your policy. This risk in turn determines your monthly payments. If you’re not in the greatest of health, your policy might be a little pricier than someone who’s a little healthier.
If you’re older and are concerned about being asked to have a medical, or if you have a pre-existing condition, consider over-50s life insuranceYou should be able to find cover without disclosing anything about your state of health. The only drawback is that the payout you’ll get might be lower with an over-50s policy. Before you sign up, make sure it’s enough to cover your mortgage.
If your beneficiaries make a successful claim after you die, the payout goes directly to them. It’s then up to them how the money is used. They could use it to pay towards funeral costs, or cover other debts./p> However, most people use the payout to cover the costs of the mortgage. As this is usually the biggest outstanding debt, paying it off takes a lot of the financial strain off losing a partner, or parent. It also means they’re able to keep their home, rather than having to sell it to cover these debts.