Mortgage protection
A type of life insurance designed to pay off a mortgage if the policyholder dies during the term. The most common form is a decreasing term policy, where the sum insured reduces in line with an outstanding repayment mortgage balance.
How mortgage protection insurance works
Mortgage protection is structured as a decreasing term life insurance policy. The policyholder (usually the mortgage borrower, or joint borrowers) pays a monthly premium for the length of the mortgage term. If the insured person dies within the term, the policy pays a lump sum — designed to clear the outstanding mortgage balance — to the beneficiary or directly to the mortgage lender.
Because the sum insured decreases each year in line with the reducing mortgage balance, the premium is lower than a level term policy of the same initial sum. The assumption is that the largest risk — the full mortgage balance — exists at the start, and diminishes as the mortgage is repaid.
Decreasing term
Sum insured reduces monthly, tracking a repayment mortgage balance. Cheapest option. Only appropriate for repayment mortgages.
Level term (mortgage protection)
Sum insured stays fixed. Used for interest-only mortgages or when the borrower wants a payout that exceeds the mortgage balance.
Joint life policy
Covers two borrowers on one policy, paying on first death only. Cheaper than two separate policies but leaves the survivor uninsured.
Two separate policies
Each borrower has their own policy. More expensive in total but each person retains cover after the other's death.
Mortgage protection after divorce or separation
A joint mortgage protection policy requires careful attention on separation. If the mortgage is transferred to one person's name, the joint policy no longer aligns with the debt. Options include: separating the policy into two sole policies (if the insurer permits), cancelling and replacing with individual policies, or one party taking over the joint policy where possible. Act before the financial settlement is finalised to avoid gaps in cover. See our article on insurance after divorce.
Mortgage protection FAQ
Frequently asked questions
- No. Mortgage protection is a life insurance product — it pays off the mortgage balance on death. Buildings insurance covers physical damage to the property. Mortgage lenders typically require buildings insurance as a condition of the mortgage; mortgage protection insurance (life insurance) is not legally required but strongly recommended for anyone with financial dependants who could not maintain the mortgage without the borrower's income. See term life cover.
- A joint decreasing term policy typically pays out on the first death only — once the payout is made, the policy ends. The payout clears the mortgage, which removes the main purpose of the cover. The surviving partner is then mortgage-free but has no further life insurance. It is worth reviewing whether the surviving partner also needs separate life cover for their own ongoing expenses and dependants.
- Decreasing term cover has a sum insured that reduces over time, roughly tracking the outstanding balance of a repayment mortgage. It is cheaper because the potential payout decreases. Level term cover maintains the same sum insured throughout the term — more appropriate for interest-only mortgages (where the capital balance does not reduce) or when you want the payout to leave a surplus above the mortgage balance. See term life cover.
- An existing decreasing term policy is linked to the original mortgage terms (loan amount and term). If you remortgage to a higher amount or extend the term, the existing policy may no longer provide sufficient cover. You may need to take out a new policy to top up the cover, or replace the existing policy entirely. Check whether your existing policy has any early termination penalties before cancelling. If your health has changed since the original policy was taken out, a new policy may attract higher premiums or exclusions.