Buying a home – especially for the first time – can be a stressful experience. There are a whole load of costs to consider – over and above your deposit. The paperwork seems never-ending. Add the emotional investment and strain, and it becomes clear why buying a home isn’t something most people do lightly or often. And one of the questions that always comes up – particularly among first-time buyers – is, ‘do you need life insurance to buy a house?’
….do you need life insurance to buy a house or flat? The simple answer is ‘no’. But that comes with a list of caveats that are worth paying attention to. For many people, whether they’re single or buying with a partner, a mortgage will be the single biggest financial commitment of their lives. The cost of that mortgage over twenty or twenty-five years will likely run into several hundred thousand pounds.
Some lenders make it a condition of the loan that their customers are covered by life insurance, but this isn’t common by any means. Even though it may not be a necessity, it’s worth considering what could happen if you don’t have some kind of life insurance.
What Happens if You Don’t Take Out Life Insurance?
If you’ve taken out a manageable mortgage, keep up the repayments, don’t fall ill or have a serious accident, or one of you dies, then the answer is ‘nothing much will happen’. You’ll pay off the mortgage, and you’ll own the property. You may move house – with a consequent adjustment to your mortgage. The situation fundamentally remains the same even if the amounts vary a bit; you pay a monthly amount until the mortgage is paid off.
What happens if one of you dies?
A Scenario No One Wants to Think About
A couple takes out a twenty-five-year mortgage. They borrow 80% of the value of their new home. They earn similar salaries. The repayments, between them, are a bit of a stretch in the early years, but manageable. They have no life insurance. Five years into the term, one of them passes away suddenly. On top of the emotional stress and trauma of losing a partner, there is a mortgage to pay. And now it’s too much for one salary.
The house – their home – has to be sold. On top of having to sell the home that saw many happy years for the couple, the housing market has slowed a bit. Buyers aren’t queuing up, and additionally, the house isn’t worth as much as was thought.
Several months and a few stressful meetings with the bank later, and the house has been sold. But it sold at a lot less than anticipated. Everything is wrapped-up – lender paid off, estate agent fees settled etc. But the surviving partner doesn’t have enough money to buy a new home – even a much smaller one.
It didn’t have to be like this. A life insurance policy would have prevented much of the stress – and the need to sell.
Types of Life Insurance?
Life insurance policies vary according to a whole range of criteria. Is the policy for one or two people? How old are they? How much are they borrowing? How many years do they need the cover for? If it’s for a couple, do they want the whole mortgage paid off in the event of one of them dying or just a proportion?
One option is a decreasing life insurance policy. Essentially this covers a repayment mortgage with the cover reducing in line with the mortgage debt, as the outstanding amount decreases over time.
Life insurance premiums vary according to precise need. In very simple terms, many people would be looking at premiums in the low hundreds of pounds each year for hundreds of thousands of pounds of cover. A small price to pay for peace of mind.
Other Insurance Cover to Consider
The death of a partner can significantly impact the surviving partner when it comes to mortgage payments. There are other circumstances in which paying a mortgage can become very challenging. The two most common examples are critical illness or injury, which can put someone out of work for a lengthy period of time, and also unexpected job loss.
Policies and cover for both critical illness and income protection are another layer of protection to consider. Again, premiums will vary according to a range of factors. Get some advice from a broker or specialist.
Do You Need Life Insurance to Buy a House – It’s About Peace of Mind
Thankfully it’s rare, but sadly some people do pass away in the prime of their lives. They leave dependents not only grieving, but in some cases, with significant money worries. So if you’re wondering whether you need life insurance to buy a house, it’s worth remembering that a suitable policy goes some way to alleviating stress and worry should tragedy strike.