Types of cover for mortgage holders to consider

Posted 8 April 2016 by Nick Parkhouse

WhatHouse? looks at ways mortgage holders can protect their home loan - and their home - from a range of financial risks...

Research from Scottish Widows in 2015 found that half of all mortgage holders in the UK have no life insurance and risk losing their home if the worst were to happen.

The study found that around seven million UK adults have no life insurance, leaving their families and beneficiaries with a potential financial problem in the event of their death.

With even fewer mortgage holders protecting themselves against serious illness and sickness, there is a huge protection gap in the UK. Our guide looks at the three main types of cover that you should consider if you have a mortgage.

Life insurance

Life insurance pays out a lump sum to your beneficiaries if you die during the term of the policy.

Most mortgage holders have some sort of 'term assurance' which provides cover for a specific period. Term assurance generally comes in two types:

  • Level-term assurance - this provides a fixed level of cover for a specified period, for example £150,000 over 25 years. It is ideal if you have an interest-only mortgage or if you simply want to provide additional protection to your family in addition to repaying your mortgage debt. If you don't die within the term, your policy lapses and you are no longer protected
  • Decreasing-term assurance - this provides cover which reduces on an annual basis. It is designed to cover the outstanding balance on a repayment mortgage, and so the sum assured decreases over the term of the policy. If you don't die within the term, your policy lapses and you are no longer protected

Term assurance can be a very cost-effective way of ensuring your debt is repaid if you die within the mortgage term. Starting at under £10 per month, life insurance is cheaper than you might imagine and will provide your family and beneficiaries with peace of mind that they will be receive a lump sum in the event of your death.

Critical illness cover

What would you do if you suffered a serious illness – for example cancer, a heart attack or a stroke – and you were unable to work for an extended period?

Critical illness cover provides a lump sum on diagnosis of one of a wide range of illnesses. While the majority of payouts are for more common issues – cancer, heart attack etc – Critical illness cover also covers you against a wide range of debilitating conditions.

This type of protection pays out a lump sum on diagnosis. It gives you the peace of mind that you have money available to repay your mortgage or pay for specialist treatment. By providing financial support it is designed to give you one less thing to worry about at a very stressful time.

Income protection

Most people overestimate how much money they would receive if they were unable to work due to illness or an accident.

Scottish Widows research found that 64% of people believed their employer would pay them either a full salary or a full salary followed by a partial salary if they were off work for a long term, when the reality is that they may only be eligible for statutory sick pay (SSP) at £87.55 for up to 28 weeks.

Income protection is designed to pay a monthly sum to you if you are unable to work due to a range of reasons. It will provide a monthly 'income' to enable you to meet your mortgage payments (and other household bills if you wish) until you are fit enough to return to work.

1 February 2017
The Whathouse.com team looks at why all homeowners should seriously consider taking out a life insurance or critical illness cover policy...Read more
How long does conveyancing take?
10 October 2017
Conveyancing is a key part of house buying. But how long does conveyancing take? We answer this question and more...Read more
Mortgages & Homes
What is Sold STC?
3 October 2017
Sold STC and Under Offer are terms you may see when looking to purchase a home, but what do they mean? Our guide explainsRead more
Mortgages & Homes

Click here to see your activities