Taking out a mortgage is one of the most common ways people get into a home in the United Kingdom. Every mortgage lender has a set of requirements borrowers must meet, however, such as having a certain debt-to-income ratio. Although UK law doesn’t force you to get life insurance to take out this type of loan, most mortgage lenders include it in their requirements, and almost all financial experts believe that having a policy to accompany your mortgage is prudent.
What Happens to the House After You Are No More
To really understand why life insurance with a mortgage is so overwhelmingly seen as necessary, you have to grasp what would happen to your home following your death, assuming the mortgage was still not paid in full. Under UK regulations, if your mortgage is unpaid, several things can happen. If you have a joint mortgage, then responsibility for the mortgage simply passes to your surviving borrower. If you are the sole owner of the house through the mortgage, then the home usually goes to a beneficiary you name in your will, but your estate must settle your debts before beneficiaries can get the property. If there are enough other assets in your estate to pay off the mortgage without selling the home, then the beneficiary might be able to get the property free and clear, but more often than not, the assets don’t entirely cover what’s owed, so the beneficiary has to refinance the mortgage loan to keep the property. Remaining owners and beneficiaries can sell the property, pay off the mortgage from the sale, and pocket whatever equity happens to be left over, as well.
The Lack of Payment Problem
In the scenarios above, all is well assuming that the remaining owners or beneficiaries have the means to pay off what’s still owed on their own. This is not always the case, however. For instance, a parent might not be able to cover both the costs of the mortgage and daycare. Similarly, many beneficiaries are not financially prepared to take on a mortgage payment. If the mortgage payments lapse enough, the lender may foreclose.
Enter the Life Insurance Policy
When you have a life insurance policy to cover the remainder of your mortgage, you eliminate the possibility that your surviving borrower or beneficiary will have trouble paying off the rest of the loan. They can take the insurance money and give the lender what is still owed without having to make tough financial sacrifices to keep the property. The fact they don’t have to worry about the mortgage payments does wonders to keep them monetarily stable, because all of the money they would have had to put toward the mortgage can go toward other needs or wants, or better yet, be invested. A life insurance policy coupled with a mortgage loan, therefore, is a very responsible way of eliminating worry, allowing your surviving borrowers or beneficiaries to maintain a good standard of living and retain a valuable asset.
A Note on Death in Service Benefits
Many people make the mistake of thinking that Death in Service benefits are a form of life insurance. This is not exactly true. Both are similar in that they pay out upon your death, but Death in Service benefits normally max out at four times your salary. You can lose them if you lose or change jobs, or if you are made redundant. By contrast, you can get insurance in a wide range of values, and they aren’t dependent on your employment. These differences mean that most lenders see insurance as the most reasonable way for a borrower to reduce risk, and that they often still want you to have a policy even if your employer gives Death in Service benefits to you.
Conclusion
Mortgages allow many UK residents to purchase a home without paying for it in a lump sum. If you pass away before you eliminate your mortgage loan, surviving borrowers or beneficiaries might have difficulty keeping up with the mortgage payments. A life insurance policy ensures that they don’t experience undue hardship to keep the home, or that the house has to be sold. This is why, if you ask “Do I need life insurance to get a mortgage?”, many experts will say you “have” to have it, even though getting a policy is not required as of 2013 under UK law. If you are single with no dependents, then life insurance becomes less vital, but you still might need to get it based on your preferred lender’s stipulations.
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