A Guide to Life Insurance for Homeowners

When it comes to taking out peace of mind insurance, it doesn’t get much more precious than your life. And although no one wants to think about it, life insurance can be key to ensuring that those most precious to you – like your children, or your partner – are financially looked after in the event of your death. And, in making sure they don’t lose their home if the worst happens.

Life insurance is a simple enough concept, but it comes with a bit of jargon. Don’t let that throw you off though, it’s much more straightforward than it first looks. Read on to discover which type of insurance could work best for your circumstances, and how to go about securing the right level of cover at a price that works for you.

What is life insurance?

On the face of it, life insurance isn’t that different to many other insurances you’ll take out in your life.

You’ll pay a monthly or yearly premium for a set amount of time, and your insurance provider will pay a lump sum (sometimes called a death benefit) to a selected beneficiary in the event of your death, within the insurance terms.

This will likely be any dependents, like your children, or perhaps a partner that you want to ensure will be on solid financial footing if you pass away. It’s also sometimes called life assurance, or life cover.

Do I need life insurance if I’m taking out a mortgage?

There are a lot of reasons it makes sense to take out life insurance if you’re buying a home with a mortgage, although many lenders don’t require it. It’s probably the biggest loan you’ll take out in your life – and so will be the biggest debt you leave behind.   

Life insurance policies can cover enough to pay off the full amount of your mortgage if you die. This means at a difficult time, your family can keep up with house payments without having to worry about a big debt they hadn’t accounted for, or the thought of losing their home. And you’ll all have peace of mind that they’ll be financially looked after when you’re gone.  

A life insurance policy can also make it easier to secure a mortgage with certain lenders – such as those who value life insurance as a part of their mortgage approval process.

Do I need life insurance cover if I don’t plan on buying a home?

It’s not a necessity, but life insurance can be a good idea in a few circumstances. For example, it helps secure financial protection for your family if you don’t have stacks of savings. This can help cover ongoing costs like bills, rent, or childcare. A pay-out from a life insurance policy can take some of the stress off after your death, as money becomes one less thing to worry about.

Different types of life insurance

There are two key types of policies:

• Term assurance 

• Whole of life assurance 

 Let’s delve in and get a better understanding of these types of life assurance cover.

Term life insurance

There are three main types of ‘term’ life insurance, all of which run for a set period (or term). These policies will only pay out if you die during the term of the policy, which can range anywhere from one year to 50 years.

• Decreasing term: Decreasing term policies pay out less as time goes on – and are common for those looking to take out life insurance to cover a specific debt, like a mortgage. In fact, they’re sometimes called ‘mortgage protection life insurance’. The amount they’ll pay out goes down over the years or months as the amount you owe on your mortgage decreases (as you make more payments).
  
  They offer timely financial security on debts, and are generally cheaper than ‘whole of life’ policies since the pay-out gets smaller over time. If you’re alive longer than the term of the policy, it’ll no longer pay out, as the amount will have decreased to zero.  
   

• Level term: With level term life insurance policies, your cover and the amount you pay stays the same for the entire term of the policy (unless you make a change). The pay-out amount stays ‘level’, so if your insurer did pay out, the amount wouldn’t change regardless of when during the term the policy holder passed away.
  
  These are handy policies if you need it to cover something more than just an ongoing debt like a mortgage, as the lumpsum could also cover other costs. The amount stays level, however, so it won’t increase in line with inflation, something to consider when choosing your coverage amount.  
   

• Increasing term: Unlike the level term policy, an increasing term life insurance cover does take inflation into account, and your insurance benefit will increase over time. The annual increase will depend on your provider, and is usually decided by review, then increased in line with inflation. This means the premium you pay will also increase. As this is a ‘term’ policy, you’re covered for the amount of time your policy is active for.
  
  Increasing life insurances are one of the more expensive types of term policies. They can be useful to cover costs that may increase over time, like funeral costs, bills and expenses, or even to help your children afford their first home.

Whole of life insurance cover

With this one, it’s in the name. Whole of life insurance cover lasts for the policyholder’s entire lifetime. Regardless of when the policyholder dies, whole of life cover will pay out to the beneficiaries – as long as you’ve kept up with your payments.  These can be set up with reviewable premiums – which usually start low, but can increase as the policy continues to run. Guaranteed premiums can seem more expensive to start with, but will stay the same throughout the policy. In general, whole of life cover is usually more expensive than term cover – as the insurer will have to pay out eventually.

Over 50s life insurance falls into this category, and can be a useful option for those looking to cover the costs of a funeral, for example. These policies can be much pricier, as they offer guaranteed acceptance – but often you can’t claim in the first one or two years. It’s not a one-size-fits-all, and there are other options worth looking into, like savings or employment benefits.

Life insurance add-ons

Some life insurance policies offer additional extras, to help keep you financially covered under other circumstances – like those which could cause you to lose your income. 

• Terminal illness cover helps protect your family with a tax-free lump sum if you’re diagnosed with a terminal illness – and is different from other coverage types as it pays out before your death. It can cover up to the amount of your life insurance policy, in order to help cover bills like a mortgage, and adapt to the financial changes that come with a diagnosis.  
   
  Life insurance policies often include terminal illness cover as a standard – although they don’t always. So, it’s important to read your documents thoroughly, or ask an advisor to explain exactly what your life insurance cover entails.

• Critical illness cover is usually an optional add-on, and offers a pay-out if you develop certain life-changing conditions that could make it harder to live as you did previously. For example, you might have to stop working, so it can help keep your bills, like a monthly mortgage payment and other finances covered.
  
  There are other protection options, like income protection insurance, which can also offer similar illness coverage – so it’s important to compare policies and options and get an understanding of exactly the level of cover you’d need. Or, chat to an advisor to discuss what would work best for your circumstances.

 Quick fire tips

• With both types of cover, the amount paid out may be taxable if it forms part of your estate and goes over a certain threshold. Writing a policy ‘in trust’ can help combat this. 

• You need to be honest when you apply for life insurance policies. Make sure you disclose everything they ask for in terms of your health – or you risk your insurer not paying out.  

• Ensure you keep up with your payments. Life insurance is often a years-long policy, and if you fall behind on your premiums, you’ll no longer be covered. 

• Work with a trusted advisor – they know the ins and outs of the different policies, and can help ensure you’re protected at the level you need, at a competitive price. It’s handy to use an advisor if you have medical conditions that’ll impact what coverage you can access.

Find the right life insurance policy for you

Browsing through life insurance quotes, policies, and levels of coverage can feel overwhelming – and there’s no single ‘best life insurance’ policy. Our expert team are on hand to help you find the right level of coverage for you, at a competitive rate – and take some of the stress off sifting through the particulars of each policy. For life insurance quotes that suit your budget and circumstances, get in touch with a knowledgeable Purplebricks Mortgage advisor.