Article on: Insurance for Home Loans
Why Insurance on Loans? (2024)
Home loans can be used to help you do several things eg…
- raise finance using your existing home to buy a 2’nd home
- home improvements to build an extension on your property
- home equity release to consolidate debts
- buy a caravan or a car
- refinance an existing home loan
- raise cash from a loan on equity in your home for a rainy day income fund
The Home Loan could be setup usually 2 ways…
- Interest only (repaid upon death)
Note: The lender that has your 1’st home mortgage loan has to consent to you getting a 2’nd home loan (secured) as second charge mortgage upon your property.
You probably have some protection insurance on loans in place on your first mortgage. However, as you are now borrowing more, you will probably also need more loans insurance cover?
Or it could be the new home loan term is now longer or set up in joint names, so your existing loans insurance cover policy is now inappropriate?
Please read on & see different types of insurance with loans options available for these 2 main types of home loan.
Do you have to take Home Loans Insurance?
We are often asked this as Brokers, do you have to take out home loans insurance? In days’ gone by, the main Bank or Building societies lenders often made it obligatory to have their insurance on home loans.
Back then, it was usually ‘Yes’ to insurance for home loans (often via them) as a pre-condition of their lenders home loan. In the 2020’s, the answer now to is insurance on home loan mandatory?…then the answer is usually ‘No’.
When signing up for the borrowing, it is often recommended within their small print….but you are often not legally obliged to get insurance to protect home loan.
Some specialist lenders may still make it a condition to get a home loan insurance policy. However, whoever you are taking out a new home loan with, they should not make you take insurance out via their company only.
You should be free to search the marketplace for your best insurance for home loan, as long as the plan is suitable to your protection needs.
See below our comments as why perhaps not to use Banks & Building Societies for their Home Loan Life Insurance.
Do you need Insurance for Home Loans?
Now, this is a totally different question….do you need insurance for home loans? What if 2 people take out a new joint home loan (whether married or a couple) and those 2 people are also named on the joint home loan deed?
Then your lender can potentially go after either one of you, for the full repayment of your joint home loan debt. This means if one of you sadly died, or is critically ill, then the other person could be left with the full debt. If this happens to the main family breadwinner, the situation could be even worse.
The surviving partner can now be legally pursued by the Lender for future ongoing home loan repayments. At your worst time, the situation could get even worse
Considering taking out a home loan, 2nd charge or remortgaging & now wondering…Do you need Life Insurance for home loans?
Then, please consider these reasons for Your 3 x Maybe….
Your 3 x ‘Maybe’
- YOUR HOME ‘Maybe’ your biggest asset
- YOUR HOME LOAN ‘Maybe’ your biggest debt
- YOUR HOME ‘Maybe’ repossessed if you do not keep up repayments on your home loan
CONCLUSION: 3 x ‘Maybe’ you do need Insurance on Home Loans
Life Insurance for Home Loans
When looking at life insurance for home loans, also look at the wider picture of what may happen if the worst happens. People often forget about this bigger picture & just concentrate solely on covering just their home loan with insurance.
Although that particular life policy has now paid out, you may still need to have ongoing income to pay your bills. If not, and say the main breadwinner had died, would you now have to sell your home?
- Your secured home loan on property payments are only part of your regular monthly outgoings
- Other ongoing expenses include Food, Gas, Electric, Mobile, Travel, Credit cards, Utilities etc;
- Regular monthly bills will not stop if sadly someone dies
- Likewise you would also still have to cover funeral costs and maybe repay other debts
- It makes sense to have both a Home Loan Life Insurance & Family Life Insurance if you have dependants (young or old)
Home Loan Life Insurance = Decreasing Term Insurance?
- This Protection is designed to help insure a repayment style home loan or other secured debt
- The debt amount owing will reduce over the term if you keep up repayments
- A decreasing term insurance on home loan will also reduce over its term or time period
- The plan payments stay the same throughout the home loan life insurance policy
- Cover is ‘underwritten’ so Insurers ask you medical lifestyle questions before offering terms
CONCLUSION: Home Loan Life Insurance cover helps protect repayment home loan
Home Loan Interest Rate v Life Insurance Plan Rate
- Many home loans or secured loans are setup on a repayment basis nowadays
- Lenders set a ‘rate of interest’ on the home loan which can be fixed for period eg; 4.99% 5 years. Alternatively it can be variable
- When you setup a Home Loans insurance plan, Insurers also set a ‘rate of interest’ at which the policy reduces from outset
- These ‘rates of interest’ varies between these insurance plans for home loan providers
- Some have a set rate of 10% or allow variable rates eg; from as low as 1% upto a high 15%
CONCLUSION: Ensure the Life Insurance rate of interest is sufficient to cover the Homeloan
Life Insurance for Interest Only Home Loan
- Interest-only home loan usually means the amount owing stays the same throughout
- How will the Capital be repaid eg; investments, retirement or just on sale?
- The capital may or may not be repaid or even reduce on Interest-only home loans
- A term insurance on home loan or whole life insurance may suit either of these scenarios
- Insurers may offer best insurance for home loan to match your different repayment styles
CONCLUSION: Check if the Home Loan Life Insurance is appropriate to your situation
3 Reasons NOT to use Banks for Insurance for Home Loan
- No Choice ? Often tied to just 1 Insurer for their insurance on home loan products
- eg; Barclays & TSB Bank just use Legal & General. NatWest just use AIG. Lloyds & Halifax just use Scottish Widows
- Charged More ? Could increase your premiums if you have any Health Issues via their ‘chosen Insurer’
- A life insurance broker can shop around to maybe get you a standard rate price
- Cost ? May charge more for their Life Insurers products by adding on ‘their margin’ or overhead
CONCLUSION: Use a Broker & shop around on Life Insurers product offers
Which is the Best Insurance for Home Loan 2022?
- There is no set answer to this question, as given types of insurance for home loan, the devil is in the details
- What type of Protection is actually required eg; cover for Repayment or Interest Only Loan
- The cheapest home loan insurance cover quote may be age costed ie; reviewable premiums
- Likewise the most expensive policy could be unsuitable to your individual case circumstances or budget
- If you have health issues, your job or hobby are higher risk then each Insurer may view this differently
Why is Critical Illness* alot more expensive?
- Critical Illness* covers a large number of risks [ could be 50+ benefits ] to help repay the home loan
- Statistically you are far more likely to be making a claim on critical illness cover, if included
- 50% of people will be diagnosed with cancer in their life [Cancer Research UK]
- It pays out on survival & recovery via specified benefit types eg; cancer, heart attack, stroke, multiple sclerosis etc;
- Do I just need life insurance for home loans or better still your loan repaid whilst recovering from critical illness ?
CONCLUSION: Insurers raise their prices based on higher risk chances of making a claim
Is Terminal Illness the same as Critical Illness*?
- NO. Terminal Illness on an insurance for home loans means you have sadly less than 12 months to live
- Once agreed by the Insurers medical claims, they will payout the potential death insurance claim earlier or in advance.
- Life Insurance for a home loan just repays the loan if you die or terminally ill
- Terminal illness benefit is often included ‘free’ as part of a Life insurance Policy
- Critical Illness is ‘paid for’, often as rider benefit alongside life insurance for home loans
CONCLUSION: People often get confused between these 2 rider benefits
- Can help repay your home loan or mortgage if you died
- Switching Insurers MAY help slash life insurance on home loans cost
- You may need it if you have dependants
- Consider joint life protection if the home loan is in joint names
- Make sure your policy has guaranteed fixed premiums
- Write your home loan life insurance policy in trust
- Trusts may help to avoid both probate delays & tax bills on death
- Quitting smoking can reduce your premiums
CONCLUSION: Martin Lewis says re-check insurance offered via a ‘Home Loans Provider’. They may not be the cheapest
What is Payment Protection ‘Insurance on Loans’ (PPI)?
- Home Loans PPI covers your payments against accident, sickness & hospitalisation
- Designed to cover the home loan payments but not life insurance for death
- A short term cover plan & usually paid for upto 12 months. May also cover unemployment
- Some new Insurers may not offer unemployment part of policy due to the Coronavirus pandemic
- Home Loan Protection Payment is the same as PPI. However, the codes for this product sale have tightened
- Various risks, pre-existing issues or employment problems may well have initial exclusions after policy starts
- Not medically underwritten [unlike PHI Insurance] meaning cover is offered with no medical tests or GP reports
CONCLUSION: Consider MPPI as well as Life Insurance for Home Loans
Insurance on Personal Loans
We have talked about insurance on home loans, which are essentially secured against your property. However, if it is an unsecured loan does that mean insurance on personal loans is now unnecessary?
No, is the answer. Insurance is just as important here. Your legal obligation to repay the lender still remains. Maybe the amount of loan borrowed is less, or the term shorter, but the impact on you or your family is still the same if you died olr were critically ill.
Should I put my Home Loans Insurance Life Policy into Trust?
When any single life insurance to protect home loan isn’t written into trust, it will be paid to the executors of the deceased’s estate. Same applies if 2 people insured died together on their home loan insurance policy. They will handle the administration, known as probate in N Ireland, England, Wales and confirmation in Scotland. If not, any lump sums benefits will fall into your estate if you died prematurely.
If you have not made a will, this can then cause further complications with the home loan insurance cover proceeds upon death.
Until probate is fully granted, no monies can also be paid out to those named in the will. On average, this can take upto 6 months or longer. Your home loans lender would need to be advised why the debt is not being repaid? Interest may still accrue and any payments may still be required, if the home loan is in joint names.
By not placing the insurance for home loan protection into trust may also swell up the total estate values, leading to potentially Inheritance Tax IHT issues.
So placing a policy in trust can help to ensure that the policy proceeds go to the correct beneficiaries you decide to nominate at that stage. It can also help avoid possible probate delays & IHT costs. Ask the Insurers to kindly provide their available standard trust form wordings & seek legal advice if unsure.
Importance of Insurance Disclosure & Claims?
All Insurers are in business to protect, insure & payout. Home loans insurance cover is therefore based on your full disclosure at the time you take the policy out ie; being 100% as honest & accurate as possible.
It is not always easy to remember all your historic health details when applying. The Consumer Insurance Act 2013 says you must not be acting careless, deliberate or reckless when applying. If so, it may not payout! eg; If you occasionally smoke but intend to quit smoking, then you must tell them you are smoker. Or forget a familial history of blood pressure or cholesterol (even if it costs more).
Should you make a claim, your Insurers will send you a claim form for you to complete. Once received back, they will usually contact your GP to confirm any health details. They will then assess if your home loan insurance policy claim is valid and cross check if you originally disclosed all the correct details. If you look at the Insurers recent claims payout, you will see that it is Good (but like most Insurers – not 100%).
What if my health or lifestyle changes after I have taken the policy?
Any health or lifestyle changes since, usually does not void your existing home loans insurance policy, if it wasn’t relevant at that time of initial underwritten insurance application. It maybe the Insurers request GP reports when you originally apply, to check any health details disclosed. Likewise they may not.
So take care to doubly re-check on your application what you initially disclosed to the Insurers, as this information then stands now and in the future. Please check your original insurance for home loan protection T&C’s.
Insurance on Loans | Joint v Single Life?
A ‘joint’ life insurance on home loans usually means it jointly covers 2 lives but then pays out on ‘1st death or claim’ basis. This means once the chosen amount of cover is paid, the life insurance for home loans policy benefits would then end. This is usually the cheaper option for Insurers (as it only pays benefits once) but conversely leaving the surviving partner without any cover.
So, if you have a joint home loan and the joint lifecover is not fully used to repay the home loan (as there are other debts), then there could be an issue for the surviving partner. In this instance, you may also need alongside some additional family life cover.
Is there a benefit of having 2 x seperate life insurance for home loans if in a relationship & one domestic partner claims, then the surviving partner still has their own seperate policy?
A single life insurance loans policy means it covers just that 1 person only. It then pays out the chosen amount of cover if the person dies, or is terminally or critically ill during the term of the policy or whenever the event occurs it occurs if whole life.
Insurance on Home Loan Calculator
As whole of market brokers, we give you free access to a range of leading UK Insurers offering term insurance on home loan deals. Fill in some basic details & in 15 secs our insurance on home loan calculator will give you an idea of the best deals available from cheapest to most expensive. You can view their key features & terms.
You can vary the policy term, add optional critical illness to the life insurance, which can be either level for interest only home loans or decreasing. You can quote single or joint life loans insurance.
Alternatively, quote for income protection to help cover your home loans payments if you are off sick, have an accident or hospitalised.
CONCLUSION: Let us help arrange your ideal Home Loans Insurance policy
As you can see there are various types of home loans insurance protection. If you are at all unsure what maybe best for your situation, or have health issues, please contact us for broker help.