Mortgage life insurance

Mortgage life insurance: The need-to-knows

Mortgage life insurance - also referred to as mortgage protection - is a type of life insurance that pays out if you die before you finish paying your mortgage, ensuring that your spouse and dependants don't need to worry about the monthly repayments.
It can be called mortgage life insurance or assurance. You insure something that MAY happen, while you assure something that WILL happen. Death is of course assured, but as the question is "will you die before your mortgage is paid off?" many call it insurance, and here's what you need to know.

Mortgage life insurance pays off your mortgage if you die before it's paid off

There are two types of life insurance that you can get to cover your mortgage. Decreasing term life cover is the most common type and pays out what's left to pay on your mortgage. You can also take out level term, which pays out a set lump sum if you die within a fixed term - this can be used to pay off an interest-only mortgage.
Decreasing term life insurance is the cheapest form of life insurance. As time passes, and your mortgage debt reduces, the payout on death also reduces leaving your dependants with the money to pay the rest of the mortgage.
Level term cover, which tends to be more expensive, pays out a set lump sum during the mortgage term. See Cheapest Level Term Insurance for more.
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You need to take out enough cover to cover your mortgage. It might sound obvious, but if you take out mortgage life insurance you need to make sure the sum is enough to pay off your mortgage, should you die first. For example, if you've got a 10-year mortgage for £200,000 it needs to cover this.

What is the difference between mortgage life insurance and mortgage PPI?

Don't pay for your mortgage life insurance twice

You may not have what's called 'mortgage insurance' but your mortgage could already be covered should the worst happen. This is because you might already have level term life insurance. This pays out a lump sum if you die within a set term, eg, £300,000 if you die within 20 years. This cash could not only to go towards your dependants and their living costs but it could ALSO be used to pay off your mortgage.
On the face of it, mortgage insurance is generally cheaper (we're talking decreasing term cover here) than level term but it's always worth comparing the price of the two policies (see our table of best buys below). If there's not much in it, level term insurance could be a better option for you as it provides more cover.

What would happen if I don't take out mortgage life insurance?

Do I need to buy it from my mortgage provider?

You don't need it if you don't have dependants

If you have no dependants and are single, then you'd be right to question why you would bother to get this policy. This is all about paying off your mortgage when you're gone, so if you've no one you'd want the house to go to, then don't bother.
However, if you do have dependants, such as a partner and/or children or anyone else who relies on your income and if paying the mortgage would be a struggle, this is a cheap way to solve that.

Switching MAY slash costs

Buy from your mortgage lender, bank or insurer and you just get what you're given. Use comparison sites and while they find your cheapest policy, they get a huge whack of commission (even if you then went and bought direct from the insurer you wouldn't save as insurers just keep the commission themselves). If a new quote shows you can save (make sure the cover is at the same level), all you need to do is set up the new cover. Once it's in force, cancel your existing policy.
As MSE Eesha found: "I took out cover 3yrs ago for £23/month. After joining MSE & following the guide I found the SAME policy with the SAME provider for £9/month. Over the 15 years I've left I'll save £2,520."
You won't always save switching; the fact you're older, or have had health conditions (always declare them) since you got the policy can kaibosh savings. Yet no harm getting a quote, especially if you've since quit smoking.
However, always check the policy carefully as if your policy was bought years ago, or you've had health problems, the savings from buying a cheaper policy may be cancelled out by your increased risk level and/or age.

Make sure the cost is fixed each month with 'guaranteed premiums'

When you buy mortgage term cover you will be given two choices of premium. It can be guaranteed or reviewable.
If your premiums are guaranteed, your insurer will never change the price, so you'll know what you'll be paying over the life of the policy. Reviewable premiums, on the other hand, cost less at first, but your insurer can hike costs later on, meaning a cheap deal can potentially become costly as you age.

The less risk you'll die, the cheaper the cover

The cost of the cover increases with the likelihood of death within the term – age, health, having a risky occupation or being a smoker can all increase the price. So a 55-year old chain smoking skydiver may struggle to get a good deal, even after reading this.
Pricing radically changes depending on who you are so it's important to disclose everything. However, the rules around disclosure are changing and from August 2016 insurers will be unable to unfairly reject customers' claims if they've given the wrong information about a part of their policy that is irrelevant to their claim (see the news story: New insurance laws will stop insurers wriggling out of claims). But until then....

Disclose everything; all past conditions and any risks. If not, your insurer may use 'non-disclosure' as an excuse not to pay out.

Each insurer has its own rules on pre-existing medical conditions. If you've had issues, it's worth speaking to a broker, who will know which insurers will give you the best rates.
At what point you need to disclose all your medical information depends on who you buy the cover from. If you are buying it from a discount broker it's very much like getting home or car cover from a comparison site. The broker will ask you a few basic questions and then you will be sent to the website of the insurer, which will ask you for much more detailed information, such as your medical history.
Advisory brokers, on the other hand, will ask the detailed questions before you speak to the chosen insurer.

I don't want to disclose conditions. Is there another policy I can get?

Write your policy in trust and the money can't be claimed by the taxman

If you die your mortgage life insurance forms part of your estate, which could mean it's hit with a huge whack of Inheritance Tax. In many cases it's possible to avoid this by writing the policy in trust, if it's done at the time the policy is taken out.
If you write in trust the insurance pays out directly to your dependants, so it never becomes part of your estate, which avoids inheritance tax and speeds up the payout.
This is relatively easy to do. When you get most insurance policies they include the option (and papers) for writing in trust directly at no extra charge. If you know what you are doing, you can write the policy in trust yourself. If not, get advice from one of our cheapest advisory brokers or see our guide on Independent Financial Advisers.

How do I put my life cover in trust?

Two single policies can be better than joint cover

When you buy mortgage life insurance, you have the choice of buying a single or a joint couples policy.

A joint policy vs two single policies

Joint policy: The pros

...a joint policy is cheaper than two single policies.
...if you are married but have no dependants it's much less hassle to set up a joint policy compared to two single ones.

Joint policy: The cons

...if you have dependants you will only get one payout, usually on the death of the first policyholder. Single policies, however, pay out twice.
...if you split with your partner you may have to cancel the cover (unless you're still on good terms) and buy two single policies, priced on your new age and health, which will be more expensive.

Two single policies: The pros

...each policy will pay out on the death of each person, rather than just on the first death, which is what happens with a joint policy. So you get two payouts rather than just one.
...if you split with your partner you would not have to buy a new policy.

Two single policies: The cons

...two singles policies are typically more expensive than a joint policy.
...if you are married but don't have dependants you will only need one payout – to your partner. So there is no need for a second payout as there would be no one for it to go to.

The monthly cost of two single policies at £400,000 each vs one joint policy at £400,000
Both 30 years old		Both 35 years old
Two single policies	One joint policy	Two single policies	One joint policy
£16.84	£12.31	£22.18	£18.30
All prices are for non-smokers. Figures obtained via Moneyworld with L&G in February 2018.

Does my partner need to use it pay off the mortgage?

Quitting cigarettes lowers your premium

Non-smokers pay a lot less than smokers, because they're a lot less likely to die during the term. To count as a non-smoker, you need to have been genuinely nicotine-free for at least a year and in some cases longer, so always check.
Therefore one year after you quit, get a new deal and you could save big. But don't be tempted to lie. If you die and it is discovered you had been a smoker, it could invalidate the policy. If you are seriously giving up, it's a good idea to get it noted on your medical records to back up any potential claim. See other savings in the Stop Smoking MoneySaving guide.
It is also worth noting that some insurers have tightened their criteria and their cheapest policies now outline that you need to have been smoke-free for five years to count as a non-smoker.

I've stopped smoking last month, am I classified as a non-smoker?

You are protected if your provider goes bust

Many things can happen during the lifespan of the policy, and while your mortgage insurance company may be doing well now it could be a different scenario 20 years down the line. If something happens, here's how it would affect you:

If your insurer went bust. If your provider goes bust, the Financial Services Compensation Scheme (FSCS) will try to find another insurer to take over or issue a substitute policy. However, if you've ongoing claims, or need to claim before a new insurer is found, the FSCS should ensure you're covered (always check new insurers are on its register to make sure they're UK registered). For more see the insurance section of our Savings Safety guide.
If your broker went bust. The only payment you're likely to make to a broker will be the fee for arranging the policy, which is often no more than £25.

In the unlikely event your broker went bust after you paid it but before your insurance was arranged, the chance of you getting your money for the fee back is slim. Saying that, the FSCS would be able to help with any premiums lost as a result of a broker going bust, as these payments are ring-fenced, but this is unlikely to extend to broker fees in this instance.

How to slash the cost of mortgage insurance

The worst way to get mortgage insurance is by going straight to an insurer or mortgage provider, here you pay full price and don't check whether it's the cheapest on the market. What many people do – which makes them feel they have the best deal – is to use a comparison site. It scours the market to find you the cheapest deal.
However, what comparison sites don't tell you is they're a taking a huge whack of commission by doing so. But there is a way to slash costs by using a discount broker...

The top discount brokers

Here – as long as you don't get advice – you can buy a policy through them (usually for a fee of £25) and they rebate all the commission they get from the insurer into your policy (so you basically get a discount hence the name discount broker). So, while the fee is a one-off £25, you can save £1,000s over the life of policy. It's an easy win.
Having reviewed the main 10 discount brokers on the market for a range of quotes, here are our top brokers:

Cavendish Online is an online broker with a £25 fee, which rebates all commission. This broker also promises to price match its competitors.
Moneyworld is another online broker (with a £25 fee) and promises to price match its competitors. It also rebates all commission.
Money Minder is also an online broker with slightly higher premiums and a £25 fee, which rebates all commission.

You may wonder why the prices below are slightly different when each rebates all of the commission. It's because each discount broker has a different deal with the insurers and therefore the prices aren't always the same.

Our suggestion is to always check the top two and then add in the rest if you've time. Remember if you're not sure what you're doing, consider getting advice..

Cost of mortgage (decreasing) term life insurance Guaranteed prices over a 25-year term with £200,000 benefit

	30 year old (non-smoker)			45 year old (smoker)
	Monthly	Total cost	Difference compared to the cheapest broker	Monthly	Total cost	Difference compared to the cheapest broker
Cheapest discount brokers
Moneyworld (includes fee)	£5.29	£1,610	Cheapest	£28.23	£8,490	Cheapest
Cavendish Online (includes fee) (1)	£5.31	£1,620	£10	£28.23	£8,490	Cheapest
Money Minder (includes fee)	£5.58	£1,700	£90	£28.23	£8,490	Cheapest
Cheapest advisory brokers (quality of advice may vary, see below)
Cavendish Online (advisory) (1)	£6.36	£1,930	£320	£33.09	£9,950	£1,460
Money Minder	£6.54	£1,990	£380	£33.09	£9,950	£1,460
LifeSearch	£6.71	£2,040	£430	£34.96	£10,510	£2,020
Typical comparison site, Bank and insurer
Typical comparison site	£6.93	£2,100	£490	£36.88	£11,090	£2,600
Typical direct bank	£7.38	£2,240	£630	£38.43	£14,550	£3,060
Typical direct insurer	£8.28	£2,510	£900	£47.88	£14,390	£5,900
Note: Correct as of February 2018. (1) Cavendish Online will price match or beat an alternative quote on a like-for-like basis.

The top advisory brokers

It's important to understand that the discount brokers above are "execution only". This means they don't give you advice, they just find you the cheapest policy.
If you are not sure what kind of policy you need, or you have complicated circumstances such as medical conditions, it is worth getting advice on buying cover, yet doing this means a broker will take some commission and you'll therefore pay more. On top of advice about life insurance, our top picks do the following:

LifeSearch is an independent adviser with online and phone access. It will also write your policy in trust for free and offers counselling and guidance to your loved ones after you die.
Money Minder is also an online broker able to provide independent advice with online and phone access.
Cavendish Online can also arrange cover on an advisory basis and will consider many medical conditions for those who may have trouble getting cover. They also promise to match (or beat) a cheaper quote on a like-for-like basis.
LifeAssure Online is another independent adviser with online and phone access. They have previously appeared in our cheapest advisory broker table so are worth considering. It also sells over-50s life insurance and funeral plans.

Alternatively, you can speak to an independent financial adviser (IFA). IFAs cover life insurance, among other products, and may be able to see where it fits in with your other protection and wider money issues. It's also a good idea if you'd prefer face-to-face advice (most brokers tend to be phone based). They are regulated and must pass exams on more subjects than brokers, though the costs can vary depending on whether you pay fees or commission. For more and how to find an adviser, see the IFA guide.

Can I complain if I get advice and it leads me to the wrong policy?

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The insurance industry doesn't have the best customer service reputation and while a provider may be good for some, it can be hell for others. Common problems include claims either not being paid out on time or at all, unfair charges, or exclusions being hidden in the small print. It's always worth trying to call your provider first, but if not then…

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