Life insurance for first time buyers
See how life insurance can cover you as a first time buyer
Key points:
- You don’t need life insurance to buy a home, but it could help pay off your mortgage if you die during the policy term.
- Different types of term life insurance including level term, decreasing term and increasing term insurance, can help meet different needs
- Decreasing term insurance is commonly used to help protect a repayment mortgage, while level term and increasing term insurance may be suitable where a fixed or rising level of cover is needed.
- Starting cover when buying your home and matching it to your mortgage term can help ensure protection throughout repayment.
In this article, when we say 'life insurance' we are talking about term life insurance which covers you for a set period of time and pays out a sum of money if you die whilst you have the policy.
Buying your first home is an exciting milestone, but it also comes with new financial responsibilities. One way to help protect your investment and meet these responsibilities is by taking out term life insurance.
Here’s our simple guide to understanding life insurance for first-time home buyers.
Do I need life insurance to buy my first home?
You don’t need life insurance to buy a home, and it’s not a legal requirement.
However, to help ensure your mortgage could be repaid if the worst were to happen, it's often recommended that your life insurance cover is broadly aligned with the amount you owe on your mortgage. If you pass away while you hold the policy, the payout could be used to help repay the outstanding mortgage balance, easing the financial pressure on your loved ones.
If you’re unsure about what life insurance cover can look like, we’re here to help. You can visit MoneyHelper for help finding an independent adviser. You can also read more about life insurance policies on the Aviva website.
What type of life insurance do I need when buying a house?
There are a few types of life insurance that you should consider when buying a house. You might also consider the same life insurance options if you are renting, as they can help any family you leave behind keep up with the rent and bills.
Level term life insurance
Level term life insurance is often a popular choice for first-time home buyers.
It provides cover for a specific period, for example 20 or 30 years, that can align with your mortgage term. If you die during this period, the policy pays out a lump sum that can be used to cover the remaining mortgage value.
Decreasing Term Life Insurance
Decreasing term life insurance, often called mortgage protection insurance, is another option. The cover amount decreases over time, broadly in line with your mortgage as you pay it off.
This type of insurance is usually cheaper than level term life insurance because the payout reduces as your debt decreases, so you only pay for the exact amount of cover you need.
Increasing Term Life Insurance
Increasing term life insurance means the level of your cover increases annually by a set percentage or in line with an inflation index, such as the Retail Prices Index (RPI) or Consumer Price Index (CPI).
This could be an option for first-time buyers who are concerned about inflation potentially eroding the value of a future life insurance payout. It's worth noting that your monthly payments will also increase with the level of cover. Prices generally increase at a higher rate than the cover amount, but many policies will allow you to opt out of cover increases if you find it unaffordable.
When should I start my cover and for how long?
It's never too late to get life insurance, but you should consider starting your life insurance coverage as soon as you buy your home or even slightly before. This ensures that your mortgage is covered from the moment you become responsible for it.
Think about matching the length of your life insurance to at least the length of your mortgage. If you have a 25-year mortgage, for example, consider a 25-year term life insurance policy. This helps make sure you have cover for the entire period you are paying off your home loan.
What happens to my mortgage if I die?
If you die while your life insurance is active and your claim is accepted, the insurer will pay out a lump sum.
If your policy is held under trust, the payout will be made to the trustees for the benefit of your chosen beneficiaries (like a spouse or children). A trust is a legal arrangement that allows you to leave money and things you own to chosen beneficiaries when you die. Find out more about putting life insurance in trust. If your policy is not held under trust, the payout will be made to your estate.
This money can help pay off the remaining mortgage balance, giving your loved ones less to worry about.
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