Do I Need Life Insurance For A Mortgage?
It’s no secret that a mortgage is a huge financial commitment. It’s perhaps the most common reason that someone gets life insurance as it helps to ensure that a surviving partner can afford to live in the home should you pass away.
While it can be a huge help to some people, others may feel it’s an unnecessary expense. That begs the question of whether you have to get life insurance to get a mortgage and if not, should you get it anyway? That’s what we aim to clear up here.
There is nothing in the law that states you have to get life insurance. In that respect, it’s not something that you need to have. The snag here is that some lenders will have it as a precondition to signing an agreement but there are no legal barriers to getting a mortgage without life insurance.
Some will be flexible on this whereas others may have it as a definite requirement before you can proceed with your application. Quite often they’ll try and lead you to get life insurance with them or an affiliated company. Don’t feel pressured into making a quick decision as you’ll be free to choose life insurance with any company you wish.
While life insurance isn't a legal requirement, building insurance is. Like with life insurance, you should freely choose a policy that suits you and look beyond what your lender is offering. There will be times where your lender will offer you the best insurance deal but it's always a good idea to check.
Why should I take out mortgage insurance?
We’ve established that you’re not legally required to get life insurance but should you be getting it anyway? There are a few compelling reasons to do so but everyone’s circumstances are going to be different. For most people, it makes sense to get life insurance.
Many homes are jointly owned and rely on at least one income to make the mortgage payments, often requiring two incomes. On solely owned properties, it will rely on one person to make the payments. In both of these situations, the mortgage can no longer be paid if someone dies.
That’s where life insurance for mortgages can be so valuable as you can remove that financial burden once you’ve passed away. For surviving loved ones, this means not only being able to stay in the same home but doing so with a much more comfortable financial situation.
Why would a lender want you to have life insurance? If a mortgage can no longer be paid, they would have to repossess and sell the property at auction, usually for a lot less than its true worth. If it doesn't sell for as much as the remaining mortgage, they will chase the shortfall which can leave people with huge debts. This situation is something that they and you want to avoid, and it can be with a life insurance policy.
Choosing the right policy
If you’ve decided to opt for a life insurance policy then there are two main types you can get. They are either full life cover or term insurance. Full life cover is where you receive a large cash lump sum upon death and the beneficiary can use this to pay off the mortgage. While this is great, it does mean higher premiums. The other option is term cover. This is life insurance that is tied into a repayment mortgage where you pay into the policy and the mortgage is paid upon death, whenever that may be. As the mortgage balance will reduce over time, the premiums don’t need to be as high. You don’t get the standard lump sum with this option but you do get a lower monthly payment and the security that your mortgage is going to be covered.
Life insurance and mortgage
At the start we asked 'do I need life insurance for a mortgage?' and the simple answer to that is, no. As we've seen, however, the answer is a little more complicated than that and mortgage insurance is going to be the right step for homeowners in most situations.
As with any form of insurance, you want to analyze your own situation and see what your needs are. While life insurance for mortgage is the right thing to do for most people, there are some who won’t need to.
Don’t feel tied into what your lender is always asking. Life insurance isn’t a legal requirement and you will be allowed to search for your own deal. Not all life insurance policies are the same so do what’s best for you and your family.
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