A life insurance policy is to provide enough protection to cover outstanding mortgage repayments should you die before you have finished paying it off. This is particularly crucial if you have a family or other dependants, as it would make sure they could keep a roof over their heads in the event of your death.

Life insurance is an important purchase to make. Most mortgage lenders insist that borrowers take out life insurance, but if yours does not, don't treat this as a good excuse to avoid the extra expense.

Top Tip

Life insurance may seem like an unnecessary additional cost, but it is worth considering seriously.

Key Fact

Life insurance does what it says on the can. If you die it simply pays out a lump sum.

Top Tip

As with other types of insurance associated with home-buying, your mortgage lender is likely to offer you life insurance when you take out your mortgage with them. This is not necessarily the cheapest option, so shopping around can save you a lot of money and give you more choice of policy.

Life Insurance For those buying homes and taking out mortgages

The point of a life insurance policy is to provide enough protection to cover outstanding mortgage repayments should you die before you have finished paying it off. This is particularly crucial if you have a family or other dependants, as it would make sure they could keep a roof over their heads in the event of your death.

Those with endowment mortgages do not need to worry about life insurance as the policy incorporates life insurance. However, nowadays most borrowers do not have endowment option mortgages, and so have to purchase life insurance separately.

What should you look for in a life insurance policy?

  • terminal illness benefit included in the policy at no extra cost: if you are diagnosed with a terminal illness then your policy will still pay out when you die, even though the insurer knows beforehand that you are ill.
  • waiver of premium means that if you become involuntarily unemployed or too ill to work, and you haven't got protection for unemployment or illness, your life policy premiums will still be paid even though you can't afford them. You will pay about 2.5% extra to have waiver of premium in your policy.

Which life insurance policy?

Different policies work in different ways, and different kinds of policies suit different types of mortgage. For example, some life insurance policies provide 'level term assurance', which means that you will be covered for the same amount throughout the duration of the policy. This suits an interest-only mortgage, which is to be paid off in a lump sum at the end of the mortgage term. On the other hand, 'decreasing term assurance' is good for a repayment mortgage - as your outstanding loan gets smaller as you pay it off, the amount of cover decreases too. Remember that if you are moving to a larger home, you will need to increase your life cover.