What Insurance Do I Need With a Mortgage? A mortgage creates a legal commitment to repay money. However, the property and household behind that commitment face several different risks.
Fire could damage the building. Illness could reduce household income. A death could leave another borrower responsible for the mortgage.
No single policy necessarily covers every risk.
Understanding what each policy does can help you separate lender requirements from personal protection choices.
At a Glance
Buildings insurance is normally required when buying a property with a mortgage.
Life cover, critical illness cover and income protection are not usually compulsory. However, they may support the household following death, illness or lost earnings.
Contents insurance protects belongings rather than the building.
The cover needed depends on the mortgage, property, income, savings and people relying on you.
Is insurance compulsory when taking a mortgage?
Buildings insurance is not generally required by law.
However, a mortgage agreement will usually require the property to have suitable buildings insurance. This protects the lender’s security against specified damage.
MoneyHelper explains that mortgage borrowers are normally contractually required to maintain buildings insurance.
Life insurance, critical illness cover and income protection are generally optional.
A lender should not normally make these personal protection policies a condition of an ordinary residential mortgage.
Optional does not mean irrelevant. It means the decision should reflect the borrower’s own needs and circumstances.
Buildings insurance
Buildings insurance covers the permanent structure of the property against events listed within the policy.
This may include:
- Walls and roofs
- Floors and ceilings
- Fitted kitchens
- Bathrooms
- Permanent fixtures
- Garages and outbuildings
Policies commonly cover risks such as fire, storm, flood, escape of water and subsidence. The exact cover varies between insurers.
The insured amount should usually reflect the cost of rebuilding the property. It should not simply match its market value.
A home might have a high market value because of its location. Its rebuilding cost could still be much lower.
Insurance normally needs to begin when the buyer becomes legally responsible for the property.
For many purchases in England and Wales, that responsibility begins at exchange of contracts. Your solicitor can confirm the appropriate date.
Leaseholders should check whether the freeholder or management company already arranges buildings insurance.
MoneyHelper notes that leasehold buildings cover may already form part of the service charge.
Read more about buildings and contents insurance.
Contents insurance
Buildings insurance protects the property. Contents insurance protects the possessions kept inside it.
Contents may include:
- Furniture
- Televisions
- Computers
- Clothing
- Kitchen appliances
- Jewellery
- Personal possessions
A useful test asks what you could remove if the property were turned upside down.
That approach is not a formal policy definition. However, it can help distinguish possessions from permanent fixtures.
Contents insurance is not normally required by a mortgage lender.
Nevertheless, replacing an entire household’s possessions after a fire, flood or theft could be expensive.
Policyholders should check:
- The total contents limit
- Single-item limits
- Accidental damage options
- Cover away from home
- Bicycle cover
- Security requirements
- Policy excesses
Expensive possessions may need to be listed separately.
Life cover
Life cover can pay a lump sum or regular benefit following the insured person’s death.
The payment could help repay a mortgage or support surviving family members.
Term assurance provides cover for an agreed period. Whole-of-life insurance is designed to continue throughout life, provided its conditions are met.
The FCA identifies term assurance and whole-of-life insurance as separate forms of pure protection.
Mortgage borrowers commonly consider:
Decreasing term cover
The insured amount reduces during the policy term.
It may be designed to broadly follow a repayment mortgage balance.
However, the policy value and mortgage balance may not reduce at exactly the same rate.
Level term cover
The insured amount normally remains unchanged throughout the agreed term.
This may provide money beyond the mortgage balance if a valid claim occurs.
Joint or individual policies
A joint policy normally covers two people but commonly pays once.
Two individual policies may provide separate cover for each person. They may cost more than one joint arrangement.
The appropriate structure depends on the mortgage, household and budget.
Read about life cover and mortgage protection.
Critical illness protection
Critical illness protection can pay a lump sum following diagnosis of a condition covered by the policy.
The diagnosis must meet the insurer’s stated medical definition.
A named illness does not automatically result in payment. Its severity and policy wording may also matter.
The payment could help with:
- Mortgage repayments
- Household bills
- Medical treatment
- Home adaptations
- Childcare
- Reduced working hours
Critical illness cover is different from private medical insurance.
Private medical insurance may pay for eligible treatment. Critical illness protection pays a benefit following a valid claim.
MoneyHelper confirms that critical illness cover is often arranged alongside life insurance or income protection.
Income protection
Income protection can pay a regular benefit when illness or injury prevents the insured person from working.
It usually replaces part of earnings rather than the full income.
Policies include a deferred period. This is the time between becoming unable to work and receiving payments.
A longer deferred period may suit someone with substantial employer sick pay or accessible savings.
Income protection may be relevant when mortgage payments rely heavily on earned income.
The FCA defines income protection as cover replacing part of regular income following illness, accident or disability.
Self-employed applicants may have no employer sick pay. Therefore, they may need to examine how long their savings could support essential costs.
Does mortgage protection cover unemployment?
Not necessarily.
“Mortgage protection” is a broad phrase rather than one standard policy.
Life cover pays following death. Critical illness cover pays after a qualifying diagnosis. Income protection commonly covers illness or injury.
These policies do not automatically cover redundancy or unemployment.
Some separate payment protection policies may include unemployment cover. Their conditions, exclusions and payment periods require careful review.
Never assume a policy covers unemployment because it contains the words “mortgage protection”.
How should you decide what cover is needed?
Begin with the event rather than the product.
Ask what would happen if:
- One applicant died
- Either applicant became seriously ill
- Income stopped for several months
- The property suffered major damage
- Household possessions needed replacing
- A dependant required continuing support
Then review the resources already available.
These may include:
- Savings
- Employer sick pay
- Death-in-service benefits
- Existing insurance
- Pension benefits
- Investments
- Other household income
Existing benefits can reduce the amount of additional cover needed. However, employment benefits may end after changing jobs.
Consider affordability
Protection should remain affordable throughout its intended term.
A policy offers limited practical value if rising household costs cause it to be cancelled later.
Compare more than the monthly premium.
Review:
- The insured amount
- Policy term
- Exclusions
- Medical definitions
- Deferred periods
- Payment periods
- Premium guarantees
- Optional benefits
The cheapest policy may not address the risk you intended to cover.
Speak to Connect Lifetime
A mortgage establishes the debt. Insurance considers what could happen around it.
The practical question is not whether every policy is needed. It is whether the household could manage the financial consequence of a serious event.
Connect Lifetime can help you review mortgage and protection needs alongside your wider financial circumstances.
Contact Connect Lifetime to discuss your options.
Important information: Insurance policies contain exclusions, conditions and eligibility requirements. Claims remain subject to the insurer’s assessment and policy wording.
