As a first-time buyer, it can be daunting taking on tens/hundreds of thousands of pounds worth of debt. Many people look towards life insurance as a means of protecting their family in the event of their untimely death. So, what do you need to know about first-time buyer mortgages and life insurance?
Unfortunately, many people find the subject of early death very difficult to talk about, often burying their head in the sand and ignoring it. However, if you are the main income earner in your family and you were to die early, this could leave your partner and children in significant financial distress.
As a consequence, the subject of life insurance and mortgages is not a discussion you can afford to ignore.
Continue reading to get all the nitty-gritty details about why a Life Insurance policy is important for first time buyers.
- – We’ve just got married, should we get a Life Insurance Policy?
- – I am beneficiary of a life insurance policy, what does that mean?
- – Does Life insurance payout before death?
- – All Different types of Life Insurance explained
We update all our guides regularly. If you are researching Life Insurance Policies and we haven’t got an exact guide that helps you, keep coming back as we update daily.
When Do I Need Life Insurance?
If you are the main income earner in your home or you have dependents, just imagine the potential financial problems they could have if you were not around. As soon as you have a family or any dependents, this is the time to consider life insurance.
There are various types of life insurance, but the two main options are whole of life cover and term insurance.
What Is the Difference Between Mortgage Life Insurance and Term Life Insurance?
Term life insurance is basically life cover for a set period of time. This term can be mirrored with your mortgage liabilities to ensure that in the event of death, there are sufficient funds available to pay off your mortgage.
While still a type of term life insurance, mortgage life insurance will reduce in line with your mortgage capital repayments. So for example, if you have a £150,000 capital repayment mortgage on day one, this will gradually reduce over time so that all of your capital is repaid at the end of the mortgage term.
As a consequence, the level of insurance cover required will fall in line with your outstanding mortgage capital. You should also see a fall in your insurance premiums.
First Time Buyer Average Mortgage in the United Kingdom in 2019
This statistic illustrates the first time buyer average mortgage in the United Kingdom in 2019. It can be seen that the average mortgage of a house for a first-time buyer in Greater London was over 343.5 thousand British pounds in 2019, more than three times the size of average mortgages seen in the North.
Do I Have to Take Life Insurance Through My Mortgage Provider?
No. In the past there were occasions where mortgage providers would “encourage” customers to take out life insurance at the same time as their mortgage. One of the main problems was that customers were unsure whether they were paying a competitive rate for life insurance.
The regulations have changed over the years, and while it is still possible to take out life insurance with your mortgage provider, there is no way in which they can tie you to a specific policy. This has introduced a greater element of competition into the sector and helped to encourage insurers to be “more competitive”.
How Is Life Insurance Paid Out?
Traditionally there is an option to take a one-off lump sum payment or regular payments over a set period of time. Where a mortgage is involved, many people will prefer to take the lump sum payment option which allows them to pay off their mortgage.
There may also be other debts to pay off, such as credit cards, personal loans, etc. In the event of your death, a life-changing event for so many people, the ability to reduce any financial stress is priceless.
There are 14.4m people in the UK with a life insurance policy.
What Is Whole of Life Cover?
A whole of life cover is a life insurance policy which, as the name suggests, provides cover for the whole of your life. Traditionally the most expensive form of life cover, it offers the most comprehensive cover and will pay out no matter when you die.
What Is Term Life Insurance?
Term life insurance is a policy which will payout upon your death during a predetermined period of time. For example, you may have a £150,000 mortgage, interest-only with the capital repaid in 25 years.
Therefore, it would make sense to take out life insurance for a period of 25 years which would pay out £150,000 in the event of your death – allowing your partner to repay outstanding mortgage debts. This is the most flexible type of life insurance, but if you were to die after the policy expired, there would be no payment.
What Is Mortgage Life Insurance?
Mortgage life insurance sometimes referred to as decreasing term insurance, is a life insurance policy which reduces as your mortgage capital is repaid. While the example above covered an interest-only mortgage, this type of life insurance sees payment on death reduce as your mortgage capital is repaid month by month.
As a consequence, the idea is that if you die within your mortgage term, then the life insurance payout will cover any outstanding mortgage.
The Total Household Spending on Life Insurances in the UK From 2000 to 2019
This statistic shows the total household spending on life insurances in the United UK from 2000 to 2019. Over the time period the total amount of household expenditure spent on life insurance fluctuated, amounting to over 12 billion British pounds in 2019.
Is a Decreasing Term Insurance Policy Cheaper Than a Term Insurance Policy?
As the payment upon your death will reduce in line with your mortgage (as one example) when taking out a decreasing term insurance policy, the cumulative premiums will be cheaper than a standard fixed term insurance policy.
In simple terms, the longer you live, the lower the payout required because you will also be repaying mortgage capital during that time.
Do I Need Life Insurance if I Live Alone?
In the event that you were to die before paying off your mortgage then your mortgage debt will become part of your estate. You may have additional assets available to pay off the mortgage, or your mortgage provider could simply instruct your estate to sell the property and repay the outstanding mortgage debt.
So, in theory, if you live alone, the need for life insurance to cover mortgage payments is not as important. However, if you have dependents such as family and/or children, then it may be something to consider.
Can We Take Joint Life Insurance Cover?
When looking to insure the lives of two people, you can either take out a joint life insurance policy or two individual life insurance policies. There are some subtle but extremely important differences. The premiums on the joint life insurance will be the cheaper of the two options simply because the policy will only payout on the first death.
After the first death, the policy is terminated when you have two individual policies covering two different people; each will payout on the death of the individual named person as long as the policy is active.
Do I Need Life Insurance if I Don’t Have a Mortgage?
If you don’t have a mortgage, then, in theory, you may not need to even consider life insurance. However, if you are a substantial income provider for your family, then it is certainly worth considering life cover. Obviously, your family will depend upon your income and if suddenly this was to disappear, would they be able to cover the bills?
The death of a partner is traumatic, let alone the potential financial consequences on top.
Number of First Time Home Buyers in the UK
This statistic displays the number of first time home buyers in the United Kingdom (UK) in 2016, by country. England had the highest number of first time buyers in 2016 with almost 285 thousand first time buyers.
Will My Life Insurance Premiums Increase if I Smoke?
Yes. When you are taking out mortgage life insurance or any other kind of life insurance, your overall health and well-being will be reflected in your premiums. Therefore, if you smoke or perhaps you are overweight, it may be sensible to address these issues before you apply for life insurance.
It is also worth noting that if you haven’t been honest on your life insurance application form, then your policy could be cancelled at any time, with no payout. This is in effect, fraud and can get you into serious trouble.
Are There Any Other Types of Insurance That I Should Consider to Help With My Mortgage?
There are various other types of insurance which you could consider, such as income protection, medical insurance and critical medical insurance. Income protection can be very useful if for example, you were made redundant and unlikely to be in a position to cover your mortgage payments for the foreseeable future.
Medical insurance and critical medical insurance offer different levels of insurance in the event that you became ill and as a consequence would struggle to cover your mortgage liabilities.
Should I Consider Life Insurance as Part of My Regular Financial Review?
Unfortunately, many people fail to consider life insurance as part of their regular financial review often to their detriment. When looking at your flow of regular income, outstanding debts and how this might impact your family/business partners, it is sensible to take into account life insurance, medical insurance and payment protection insurance.
There are also other types of insurance you could consider. When you sit down with your financial adviser, you should bring all of your financial assets, liabilities and insurances to the table. Only that way can you see the wider picture and any issues which may arise and action to take.
Should I Take Professional Advice on Life Insurance?
As we have touched on above, it is possible to structure your life insurance around your current and future financial liabilities. We are looking at mortgages, personal loans, credit cards and any other debts you can think of.
There are different types of insurance available with the most popular being whole of life cover and term cover. However, it is important to find a life insurance policy which fits your lifestyle and your finances. It is sensible to take advice.
It makes perfect sense to look at life insurance if you have an outstanding mortgage and a family to provide for. There are numerous options available which you can structure around your specific financial obligations.
While death is a subject many of us will understandably shy away from discussing, we do need to consider those left behind and the financial consequences for them.
Quick Life Insurance FAQs
Joint life insurance is a popular form of life insurance whereby two individuals are named on the policy, but only one payment will be made. Irrespective of which party dies, life insurance will be paid out on the death of the first person then the policy will end. This ensures a degree of financial assistance for the surviving party.
If we assume that you have a capital repayment mortgage with 20 years to go, the mortgage liability will reduce as interest and capital is repaid month by month. Therefore, in this instance, it makes sense to look at decreasing term insurance where payment on death would follow the downward path of your mortgage liability.
As the life insurance payout would reduce the length, you live this gives scope for reduced premiums compared to traditional term insurance.
Term insurance is a type of life insurance policy which can be shaped around, for example, your mortgage term. Let us assume that you had 20 years to go on your interest-only mortgage; you could take out a 20-year life insurance policy which would cover the repayment of capital in the event of your death.
Limiting the length of the life insurance policy in this manner (as opposed to a whole of life policy) will reduce your premiums.
Whole of life cover is what you would expect; it guarantees payment to the named beneficiary no matter when you die. There are other types of life insurance policy which only pay out on death during a certain period. As a whole of life insurance has no fixed term, the premiums will be more expensive.
Under normal circumstances, life insurance payments will be released relatively quickly in the event of the death of the individual named on the policy. The immediate aftermath of the death of a loved one is traumatic in itself without additional financial pressures.
There are certain formalities to go through, such as confirmation of death, death certificate, but once the paperwork has been completed, the process should be relatively quick.
How Can Money Savings Advice Help You With Life Insurance?
Here at Money Savings Advice, we have partnered with some of the UK’s leading Life Insurance brokers. They have already helped thousands of people get the best Life Insurance cover and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.