Do I need life insurance for mortgage? What Life Insurance do I need for Mortgage? You are not required by law to purchase life insurance for a mortgage, but some lenders may consider it a condition of letting you borrow money to buy a home. For the vast majority of homeowners, financial protection makes sense. If you own real estate, a mortgage is probably the biggest debt you’ll be left within the event the worst happens, so having an up-to-date policy can put your mind at ease.
Do I Need Life Insurance For Mortgage?
So you’ve accepted your offer for the house you want to buy, and you’ve just received your mortgage approval confirmation (good news!), so now all you need to do is order the insurance you need to do. It certainly won’t be long before you get the keys to your brand new home!
With so many different insurance policies, it’s not always clear which ones you are legally required to get a mortgage and which are optional.
Contrary to popular belief, you don’t need life insurance to get a mortgage.
One of the main reasons people buy life insurance is to ensure that their families can continue to pay the mortgage in the event of death. The consequences of not being able to pay your mortgage could result in your family being forced to sell your home and move out, which is not the preferred option at all.
Is life insurance required for a mortgage?
While not necessarily required, buying term life insurance to protect your mortgage is invaluable because of the peace of mind you’ll get knowing that your family won’t lose their home if something happens to you.
What insurance do I need to get a mortgage?
The only insurance that you are legally required to take out when taking out a mortgage is home insurance.
Home insurance covers your home against any damage that needs to be repaired. This type of insurance only applies to the architectural aspects of your home, i.e. the walls, roof, floors, furnishings, etc., not to the actual contents of your home.
Lenders should know that you have current home insurance, as their main concern is the value of your property. For example, if your house caught fire without home insurance to cover the repair costs, the value of your house would fall and the house would not be worth the loan amount. This means that in the end, the lender will not be able to get back what they loaned you to buy it.
Ultimately, this is why home insurance is required by law when you get a mortgage, and life insurance is not. But other than that, it’s a good insurance policy to have anyway, why wouldn’t you want to take care of what is probably the most valuable asset you own?
What does the term life insurance cover?
Mortgage life insurance, or mortgage protection insurance, refers to a range of life insurance products designed to pay off the outstanding balance of your mortgage in the event of your death. Your bank or mortgage lender usually offers this cover, but you can also purchase it through non-affiliated insurers. Because so many mortgage parties offer life insurance, the structure and benefits can vary widely.
Mortgage life insurance policies have a specific period of coverage, typically 15 or 30 years, and the death benefit can be structured in three ways:
- Decreasing – The death benefit can be fixed for the first few years of coverage, but then decreases at a certain rate over the life of the policy. This is intended to mimic the rate at which the mortgage is paid.
- Mortgage Principal – Some policies link the death benefit to the outstanding mortgage principal. This will behave in the same way as a declining death benefit, but if you pay your mortgage faster or slower than expected, the policy will reflect this.
- Level: the death benefit remains the same for the duration of the policy. This can be ideal if you have an interest-only mortgage, as the principal remains the same.
Restrictions on Life Insurance for Mortgages
Unlike term life insurance, term life insurance generally pays the death benefit directly to your mortgage lender. If your amount of coverage exceeds the outstanding balance on your mortgage at the time of your death, your family will not receive any overpayments.
Also, some mortgage protection policies only pay a death benefit if you die in an accident, similar to accidental death insurance. In that case, your policy will not pay out if you die of natural causes, such as cancer or a heart attack. We don’t recommend this type of coverage unless your family can handle mortgage payments without taking you two or three months to prepare. Depending on the provider, a mortgage life insurance policy can be linked to your home or included as part of the mortgage. If the policy is linked to your home, you must apply for a new policy if you move later. And since life insurance quotes are linked to your age, that means a higher premium.
Types Of Insurance To Consider When Taking Out A Mortgage – What Life Insurance do I need for Mortgage?
It’s not a legal requirement, but most mortgage lenders insist that you have home insurance when you trade contracts. This is when you legally own the property and are responsible for the building.
It protects you from the cost of repairing or rebuilding your home should it be damaged. It is important to think about the coverage you need.
Home insurance generally covers:
- The structure of the building
- Permanent fixtures, such as kitchens and bathrooms
- Outdoor buildings, such as garages and garden sheds
If you buy a house or apartment under the lease, you still need home insurance, but you may not have to arrange it yourself. The responsibility generally rests with the owner who owns the property. But this isn’t always the case, so it’s important to ask your lawyer who is responsible for securing the building.
As the moving day approaches, you may want to consider a home insurance policy to protect your belongings as well. Don’t underestimate the value of your belongings, from your television to your washing machine.
If you ever need to replace them, you’ll need enough home insurance to cover your losses. It may be cheaper to take out home and contents insurance together, but you can also buy them separately. We offer cover for both buildings and household effects.
You don’t need life insurance to get a mortgage, but if you have loved ones who depend on you financially, you may want to consider this.
Life insurance can provide peace of mind that you can be taken care of in the event of your death. It could mean that your family isn’t responsible for paying your mortgage or risking having to sell and move.
The amount of life insurance you need depends on the size of your mortgage and the type of mortgage you have. You can also factor in any other debts you may have, as well as money needed to care for dependents such as a spouse, children, or elderly relatives.
Critical illness coverage
Life insurance covers the worst-case scenario, but it’s also important to think about how to pay your mortgage if you’re unable to work due to illness. Critical illness coverage can help you and your family if you become ill unexpectedly. Insurance policies vary, so it’s worth checking which illnesses are covered.
Critical illness coverage often includes things like:
- Heart attacks
- To succeed
Critical illness coverage is usually offered as a lump sum upon diagnosis of a specific illness.
Having that money available can provide some peace of mind during a difficult time. It can be used to pay off your mortgage, pay for rehabilitation costs, or get you back on your feet.
Income Protection Insurance
This insurance provides financial support if you are unable to work due to an accident or injury. You don’t need it to get a mortgage, but it can provide a safety net in case something happens.
Income Protection pays a tax-free monthly benefit to cover your loss of income. For example, you stay informed of your mortgage payments. So you can focus on your recovery without worrying about money. If you are employed, you may be entitled to statutory sick pay if you are too ill to work. Your employer pays this for a maximum of 28 weeks. Some employers offer additional income protection as benefits, but not all. It can also be limited, so it’s worth checking out your benefits. If you’re self-employed or a freelancer, income protection can be even more important.
The benefits of term life insurance as mortgage protection
Term life insurance is the most flexible option for your mortgage protection needs. While the amount of coverage you receive with a mortgage life insurance policy is directly related to the amount of your mortgage loan, you can get much more coverage than that amount when you choose term life insurance.
Because you can choose your coverage, you can cover all your debts, income replacement, and other necessities (such as funeral expenses) with one policy. Most mortgage life insurance companies only pay your lender when you die, while term life insurance allows you to choose your beneficiaries, such as loved ones or other dependents.
Like term life insurance, term life insurance will protect your family from paying your mortgage in the unfortunate event of your death. However, unlike mortgage life insurance and other mortgage protection options, term life insurance offers many additional benefits that other options simply cannot match.
Frequently Asked Questions
When is term life insurance a good idea?
Mortgage life insurance makes sense if you have a health condition that can make term life insurance too expensive. While the benefits go entirely to your mortgage lender rather than your dependents, mortgage life insurance is ideal if your primary goal is to make sure your mortgage loan is paid off, no matter what happens to you.
Is mortgage protection the same as life insurance?
Yes and no. Like life insurance, mortgage protection policies payout when the policyholder dies, but the beneficiary is always the mortgage lender, not your family or any other beneficiary you designate. It’s helpful to think of mortgage protection as a limited type of life insurance policy with more specific rules about who pays and how much the policy pays.
What is the difference between mortgage protection and private mortgage insurance?
Mortgage protection is an optional purchase that protects you from the possibility of not being able to pay your family’s mortgage. Private Mortgage Insurance (PMI) is coverage that lenders require when your down payment is less than 20% and protects the lender in the event of default.
Conclusion – Do I need life insurance for mortgage
Life insurance is not required to qualify for your mortgage, although it is wise to consider protecting such a large asset. Mortgage life insurance offered by the lender is expensive due to a limited underwriting process. A good alternative is to take out a term life insurance policy that fits the term of your mortgage. It is a cost-effective way to protect your mortgage debt in several ways described in this article.