Do You Need Life Insurance When You Buy a House?

Is it legally required?

No. There is no law that says you must have life insurance when you buy a house. Your mortgage lender will not technically require it either, though most will strongly recommend it.

That said, we think most buyers should have it. Here is why.

Why it matters

When you take out a mortgage, you are committing to payments that will stretch over 25 to 35 years. If you die during that time, someone has to keep paying the mortgage or the property gets sold. If you have a partner or children depending on that home, life insurance means the mortgage gets paid off and they can stay.

Without it, your family could be left with a debt they cannot afford. The property may need to be sold at a difficult time, potentially in a rush and at a lower price. It is not a pleasant thing to think about, but that is precisely why people arrange cover and then stop thinking about it.

For joint mortgage holders (couples buying together), it is particularly important. If one of you died, could the other afford the mortgage payments alone? For most people, the answer is no.

Types of life insurance for mortgage holders

There are three main options worth knowing about.

Decreasing term life insurance

This is the most popular choice for mortgage holders with a repayment mortgage. The payout decreases over time, roughly in line with your outstanding mortgage balance. Because the cover reduces, it is the cheapest option.

It does exactly what it needs to: if you die at any point during the mortgage term, the payout should be enough to clear (or nearly clear) the remaining balance.

Level term life insurance

The payout stays the same throughout the policy term. If you take out £200,000 of level term cover, that is what gets paid out whether you die in year two or year twenty-four.

Level term costs more than decreasing term because the insurer's potential payout stays high. It suits people who want a fixed lump sum for their family, not just enough to clear the mortgage. It is also the right choice if you have an interest-only mortgage, because your outstanding balance does not decrease over time.

Critical illness cover

This pays out a lump sum if you are diagnosed with a specified serious illness (cancer, heart attack, stroke, and others on the policy's list). It can be taken as a standalone policy or added to a life insurance policy for an extra premium.

Critical illness cover is more expensive than life insurance alone, but it covers a scenario that is statistically more likely. You are more likely to be diagnosed with a serious illness during your working life than to die. If that happened and you could not work, how would you pay the mortgage?

What does it actually cost?

Less than most people expect. The cost depends on your age, health, whether you smoke, and the amount and type of cover.

As a rough guide, a 30-year-old non-smoker taking out £200,000 of decreasing term cover over 25 years might pay somewhere between £8 and £12 per month. Level term for the same amount and period might be £14 to £20 per month. Adding critical illness cover increases it further, but even then, we are typically talking about £30 to £50 per month for a combined policy.

When you compare that to the cost of your mortgage payment, it is a small price for a lot of peace of mind.

When should you arrange it?

Ideally, get your cover in place before completion. Some people arrange it at the same time as their mortgage application, which makes sense because your adviser already has all your financial information to hand.

Do not leave it until after you have moved in and then forget about it. We see this more than we would like. People get caught up in the move and it falls to the bottom of the list. Arrange it during the buying process and it is one less thing to worry about.

What about existing cover?

If you already have life insurance (through work, for example), check whether it is enough. Employer-provided life cover is typically a multiple of your salary (often two or four times). It may or may not be enough to cover your mortgage. And remember, if you change jobs, you may lose that cover entirely.

A standalone policy that is tied to your mortgage term gives you certainty that is not dependent on your employer.

Getting advice

Protection insurance is something a good mortgage adviser will discuss with you as part of the buying process. CGR Financial is independent and FCA-regulated, with access to a wide range of products from across the market. They can compare life insurance and critical illness policies alongside your mortgage, so everything fits together properly.

If you are a first-time buyer, our first-time buyer guide covers the full buying process, and our guide to buying costs breaks down all the expenses you need to budget for. Get in touch if you have questions or want to talk through your options.