What’s the difference between life insurance and mortgage life insurance?

There are two types of life insurance that can help pay off your mortgage if you die. Find out how they work and which option might provide the right cover to protect your family and their home.

Eve Powell
Eve Powell
Updated 6 October 2022  | 4 mins read

Key points

  • Mortgage life insurance isn’t compulsory, but it’s worth considering if you want to give loved ones some financial protection
  • Decreasing life insurance is designed for repayment mortgages as the cover reduces over time in line with your mortgage balance  
  • Level term policies are better suited to interest-only mortgages or providing a fixed payout that can help with family living costs 
  • Mortgage life insurance policies are usually cheaper than level term, but other factors like your age and health will also affect the cost

What is mortgage life insurance?

This type of life insurance, also known as mortgage protection or decreasing term life insurance, is designed to cover your repayment mortgage.

The length of your policy should match your mortgage term, with the amount covered decreasing each year as you gradually pay off your mortgage.

In theory, your mortgage balance and the amount of life insurance cover you have should both reach zero at the same time.

Having this in place means if you die unexpectedly, your mortgage balance will be cleared which will protect your home for your loved ones.

What is level term life insurance?

With level term life insurance, the amount covered stays the same for the length of the policy and isn’t linked to your mortgage.

You choose how long the cover will last, known as the policy term, and the amount you want to be covered for.

If you die unexpectedly during the policy term, your loved ones will get a payout for the full sum insured.

They can use this money any way they choose - for example, to pay off a mortgage or to help with any other debts or general living expenses.

Is mortgage life insurance cheaper than level term?

Yes, because the level of cover decreases over time in line with your mortgage balance, so premiums generally cost less.

On the other hand, level term life insurance will pay out a fixed lump sum to your loved ones if you die at any point during the policy term. And you can choose an amount that will cover more than just the mortgage.

Because the payout sum is fixed, a level term policy is usually a more expensive type of cover.

However, there are other factors that can affect how much you’ll pay, such as your age and medical history.

Which is right for me?

This will depend on your situation, whether you have others to provide for and the type of mortgage you have.

A decreasing term insurance life policy could be a good option if you’d like your family to have enough money to pay off the mortgage balance if you passed away at any point during the policy term. This type of cover is particularly suited for repayment mortgages and is usually a cheaper option when it comes to monthly premiums.

If you’d prefer more flexibility or you have an interest-only mortgage, a level term policy might be a better option. You can choose a set amount to cover all your family’s needs and match the fixed balance you’ll have to pay at the end of your mortgage term. Plus, it can extend beyond your mortgage term as the two aren’t linked.

What are the pros and cons of level and decreasing term life insurance?

There are potential benefits and drawbacks that you should consider when you’re trying to decide which type of cover you want.

Decreasing term or mortgage life insurance

  • Pros

    • It’s a good option if you want repayment mortgage protection for your family
    • Premiums are usually lower than with level term cover
    • It can give you peace of mind that your loved ones will be able to stay in the family home
  • Cons

    • It only covers the mortgage so won’t help with other debts or ongoing family living costs
    • You’ll need to review your policy if you remortgage
    • A decreasing payout amount isn’t suitable if you have an interest-only mortgage
    • If your cover decreases at a faster rate than your mortgage interest rate, any payout your loved ones receive might not be enough to cover your mortgage balance in full

Level term life insurance

  • Pros

    • Its flexibility means you can choose a policy term that goes beyond your mortgage term
    • The fixed lump sum can help with the mortgage along with other family costs
    • It’s a good option if you have an interest-only mortgage as the lump sum can be used to pay off the capital instead of the repayments
  • Cons

    • Premiums tend to be more expensive
    • Policies don’t take inflation into account, so payouts won’t keep up with rising living costs (you would need increasing term life cover for this)
    • The payout may be subject to inheritance tax if the policy is not written in trust

What else should I consider?

When you’re taking out cover, there are some other factors you should think about before you apply, including:

The amount of cover you’ll need

You’ll need to decide how much money you’d like your family to receive. Ideally, it should be enough to cover your mortgage. You should also think about giving your family financial protection on top of this to help with other costs they might face.

Inheritance tax

When you’re deciding on the payout amount, you should also consider inheritance tax. Some life insurance policies can be written into trust so the payout won’t be subject to any inheritance tax as it’s not classed as part of your estate.

Your policy length

If you choose a mortgage life insurance policy, your cover should last as long as your mortgage term. You can choose the length of cover with a level term policy, this can typically be anywhere from 10 to 30 years.

Taking out single or joint cover

You can take out cover as an individual or jointly with your spouse or partner. However, if you decide on a joint policy, be aware that this will only pay out on the death of the first policyholder, after which the surviving policyholder won’t be covered.

Optional critical illness cover

It’s possible to add critical illness cover to your life insurance policy. This can provide financial protection if you’re diagnosed with a serious insured illness, like a heart attack or certain types of cancer. The cash payout can be used to help with mortgage repayments, but this type of cover will increase your monthly premiums.

How much will my life insurance premiums be?

Mortgage or decreasing life insurance is usually cheaper than level term insurance, but how much your premiums will cost depends on other factors including:

  • Your age
  • Whether you smoke or not
  • Your lifestyle
  • Your medical history
  • Your occupation
  • The level of cover you choose
  • The length of your policy

Life insurance gets more expensive when you’re older. So the younger and healthier you are when you take out cover, the cheaper your premiums will be.

Do I need life insurance if I have a mortgage?

Life insurance isn’t a legal requirement, and most lenders won’t normally ask you to have life insurance when you’re applying for a mortgage.

However, it can be a good idea to give yourself some extra financial security, especially if you have children or other dependants.

If you don’t have life insurance and die before your mortgage has been paid off, whoever inherits your home may have to sell it in order to pay the lender the outstanding amount.