Why taking out life insurance alongside your mortgage could provide peace of mind

18 Jan 2024

Why taking out life insurance alongside your mortgage could provide peace of mind

A family playing football in a park.

Taking out a mortgage can be an exciting time if you’re moving home. However, it can also be daunting, as you may be significantly increasing your borrowing. Life insurance could provide you with peace of mind that, if you passed away, your family would still be financially secure and able to remain in their home.

Life insurance pays out a lump sum if the policyholder passes away

Life insurance is a type of financial protection that would pay out a lump sum to your beneficiaries if you passed away during the term.

It could help your family to pay off the mortgage, so they’re able to remain in their home even if your income is used to make the repayments. They could also use it to cover other costs, from taking time off work to grieve to school fees for your children.

Taking out a mortgage is a large financial commitment, and life insurance could ease your concerns about how your family would cope financially if something were to happen to you.

You can choose term life insurance, which would run for a defined period, such as the length of your mortgage, or whole of life insurance.

To maintain your cover, you’ll usually need to pay regular premiums. The cost of the premiums will depend on several factors, including the level of cover you want, your age, and your health.

Almost half of adults aged between 18 and 40 don’t have life insurance

Despite the peace of mind it could offer, figures suggest the number of people taking out life insurance is falling.

According to a report in IFA Magazine, following three years of consecutive growth spurred on by the pandemic, the estimated size of the life insurance sector fell by 8.5% – that represents a decrease of around £6 billion.

Similarly, according to FTAdviser, many families could be leaving themselves vulnerable to a financial shock. 48% of adults aged between 18 and 40 don’t have life insurance. The survey also found that the rising cost of living is the main reason people have cancelled their life insurance.

While it can be tempting to cancel financial protection if your budget is squeezed, you could end up facing even greater financial challenges if the unexpected does happen.

How to calculate how much life insurance you could benefit from

You can choose the level of cover when you take out life insurance, so you can tailor it to suit your needs.

Calculating your family’s current income and reviewing where it comes from is a good place to start – how would this change if you passed away? You might also want to consider how their lifestyle may differ too. For example, if your partner would need to reduce their working hours to care for children, it could affect their income.

Consider what you’d like the potential life insurance payout to be used for. Would having a lump sum to pay off the mortgage be enough? Or would you want it to provide a replacement income for several years, for instance, until your children reach adulthood?

Reviewing life insurance can be a difficult task. However, this step could give your family financial security when they’re grieving and support their long-term wellbeing.

Income protection and critical illness cover could be valuable too

Life insurance can act as an invaluable safety net for your loved ones if you pass away. Other forms of financial protection could also be useful if you face an unexpected financial shock. For example:

  • Income protection could provide you with a regular income if you’re too ill to work. It would usually pay a proportion of your regular salary and could help you keep up with your financial commitments, including your mortgage, if your income stops. Income protection will typically pay you an income until you return to work, retire, or the term ends.
  • Critical illness cover would pay out a lump sum if you’re diagnosed with a covered illness. You can use the lump sum however you’d like. You might choose to pay off your mortgage, use it for day-to-day living costs, or adapt your home if you need to. How comprehensive critical illness cover is varies between providers, so you should ensure you understand what conditions are covered.

As with life insurance, you can choose the level of cover when taking out income protection or critical illness cover. So, considering your expenses, both now and in the future, may be useful.

Contact us to talk about how to create financial security when taking out a mortgage

If you’d like help searching for financial protection that could put your mind at ease after taking out a mortgage, please contact us.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 10/01/2024



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