What Happens To Life Insurance When Your Mortgage Is Paid?

By Vicki Coleman

There are few better feelings in life than making your final payment on your mortgage. You can now call yourself ‘mortgage free’ and enjoy the benefits of more disposable income and financial freedom.

We all reach the milestone at different points in our lives. But the average age borrowers expect to pay off their mortgage is 59, with one in six people expecting to still be making mortgage repayments beyond the age of 65[1].

Increasing uncertainties in life also mean we don’t always know whether we’ll need to borrow more as we go, and extend the length of our mortgage. But when you get there, you might be faced with a quandary about whether or not to keep up your life insurance policy.

What type of life insurance policy do you have?

This is the first question you’ll need to ask yourself. You might’ve taken your life insurance out so long ago that you simply don’t remember. In which case, you’ll need to dig out your policy documents or give your life insurance provider a call to confirm.

Level term

Level term life insurance has a fixed lump sum that doesn’t change during the life of your policy. This type of life insurance can be a reassuring and safe option because you’ll always know exactly what it will pay out if a claim is made.

When taking out level term life insurance, the advice is to consider the type of financial commitments you want to cover. In other words, you might’ve matched the term length to your mortgage term length. In which case, as long as you haven’t paid off your mortgage ahead of time, your life insurance policy will lapse at the same time.

Decreasing term

Decreasing term life insurance (also known as mortgage life insurance) offers a pay-out that shrinks throughout the course of your policy. This type of life insurance normally has a fixed term so that your policy ends once the pay-out has decreased to zero.

Decreasing term life insurance is usually used to pay off a debt like a mortgage, so the rate of decrease should match the rate at which your mortgage debt shrinks as you pay it off. That being the case, your life insurance policy will, somewhat neatly, be worthless by the time you make that final mortgage repayment.

Increasing term

Increasing term life insurance policies have a pay-out that increases over time. This increase can either be done by adding a fixed amount to your pay-out each year, or by linking the pay-out to the retail price index (sometimes this life insurance type is referred to as index-linked life insurance).

However, increasing term policies usually only have a fixed term. So, you’ll need to check how this term correlates with your mortgage.

Whole life insurance

Whole life insurance policies offer protection - you guessed it - for your whole life. Cover starts when you take out the policy and ends when the policy holder dies, with a guaranteed pay-out as long as you continue paying your premiums.

In other words, it’s not tied to your mortgage in any way and you’ll continue to be covered even with your new financial freedom. It’s for this reason that many people like to pay a bit more in premiums to guarantee cover for life – loved ones will still get some kind of pay-out regardless of when the policyholder dies.

Do you need any other type of cover?

Just because you’ve paid off your mortgage, it doesn’t always mean you don’t have other financial commitments to think about.

If you’re the main breadwinner in your household, you might want to take out some additional cover to ensure that your loved ones wouldn’t be left in the lurch financially should you not be able to provide through illness, injury or death.

What are your options?

·     Take out a new life insurance policy – Life insurance isn’t just designed to cover mortgages but also funeral costs, other debts and can replace a loss of income. If you’re worried about a financial deficit in the event of your death, you might want to consider taking out a new level term policy.

·     Income protection – People are working longer than ever to ensure that they can live comfortably both now and in retirement. If that sounds like you, you might want to seek some income protection cover which provides a monthly income, tax-free, if you are forced to stop work for health reasons.

·     Critical illness – Just as with income protection, critical illness cover provides a tax-free lump-sum payment if you are diagnosed with a covered condition. The money can be used to support you and your loved ones if you can’t earn a living through treatment and recovery.

What should you do with your new financial freedom?

That’s only a question you can really answer. You might now be in a position to enjoy a couple of luxury holidays each year or buy a new car. Or you might prefer to be “sensible” and put any extra money away in retirement savings.

Perhaps your house is in need or some serious renovation? Now could be a good time to future-proof your property with some eco-friendly upgrades.

However, becoming mortgage free doesn’t necessarily mean you have the spare cash required to make major changes to your house. But in paying off your mortgage, you might have more leverage to release some equity tied up in your property, sometimes to the tune of six figures.

Know your options

If you’re a little unsure on the best route to take with your life cover, your best bet might be to speak to one of our experts here at QuoteSearch who will be able to help you understand your options.

Even if you don’t follow through on a quote, your information will be securely stored, and is never shared without your permission. In other words, you won’t be spammed by suppliers for the rest of your days!

Explore all that QuoteSearch has to offer today.

[1] https://www.mortgagestrategy.co.uk/news/one-is-six-to-be-paying-off-mortgage-at-65/#:\~:text=In 2020%2C the responses read,%2C 11%25 gave this answer.