Got a Mortgage? Here's Why Your Life Insurance Isn't Enough (2026)
Got a Mortgage? Here's Why Your Life Insurance Isn't Enough
When you bought your house, your mortgage adviser probably sold you life insurance. You might think you're covered.
Here's the problem: that policy likely only pays off the mortgage. Your family keeps the house but has nothing to live on. No income. No money for bills. No funds for childcare or school uniforms.
Paying off the house is essential, but it's only one piece of the puzzle. Let's look at what you actually need.
Table of Contents
- What Mortgage Life Insurance Actually Does
- Decreasing vs Level Term Explained
- Why Mortgage Insurance Alone Isn't Enough
- The Right Protection for Homeowners
- How Much It All Costs
- Joint Life vs Separate Policies
- FAQ
- Next Steps
What Mortgage Life Insurance Actually Does {#what-mortgage-life-insurance-does}
The life insurance your mortgage adviser recommended is almost certainly decreasing term insurance (sometimes called mortgage protection insurance or mortgage decreasing life insurance).
How Decreasing Term Works
- You start with a payout matching your mortgage (e.g., £300,000)
- Each year, the payout decreases roughly in line with your mortgage balance
- By the end of the term, the payout is close to zero
- It's designed to pay off exactly what you owe at any point
Example of a £300,000 decreasing term policy over 25 years:
| Year | Approximate Payout |
|---|---|
| 1 | £300,000 |
| 5 | £265,000 |
| 10 | £220,000 |
| 15 | £160,000 |
| 20 | £90,000 |
| 25 | £5,000 |
What Happens If You Die
Your family receives the payout amount at that time. If you die in year 10, they get around £220,000. They use this to pay off the mortgage.
Result: The house is paid for. They have zero debt but also zero cash.
The Problem
Your family now owns the house outright but needs to:
- Pay council tax
- Pay utility bills
- Buy food
- Pay for childcare
- Fund school costs
- Handle all the expenses your income covered
Where does that money come from?
Decreasing vs Level Term Explained {#decreasing-vs-level-term}
Decreasing Term
Use it for: Paying off your repayment mortgage
The payout tracks your decreasing debt. As you pay down the mortgage each month, you owe less, so you need less cover. This makes it cheaper than level term.
2026 cost example: £300,000 decreasing term, 25 years, age 35 non-smoker
- Approximately £12-18 per month
Level Term
Use it for: Replacing income, covering childcare, general financial protection
The payout stays the same from day one to the end of the policy. If you take out £500,000 of cover, your family gets £500,000 whether you die in year 1 or year 20.
2026 cost example: £500,000 level term, 25 years, age 35 non-smoker
- Approximately £25-35 per month
Why Mortgage Insurance Alone Isn't Enough {#why-mortgage-insurance-alone-isnt-enough}
Let's use a real example:
The Scenario
- Household income: £60,000 (one earner)
- Mortgage: £320,000 remaining
- Mortgage term: 22 years left
- Children: Two, ages 4 and 7
- Existing cover: Decreasing term for mortgage only
What Happens If the Earner Dies
Mortgage policy pays out: £320,000 Mortgage cleared: Yes Family's situation:
| Monthly Need | Amount |
|---|---|
| Council tax | £180 |
| Utilities | £250 |
| Food | £600 |
| Car running costs | £300 |
| Children's activities | £200 |
| School costs | £150 |
| Clothing | £150 |
| Insurance (home, car) | £150 |
| Basic living | £500 |
| Monthly total | £2,480 |
| Annual total | £29,760 |
The surviving partner now needs nearly £30,000 a year just for basics, and that's before childcare if they need to work.
With just mortgage cover: The house is paid for, but there's no income. The family either burns through savings, relies on benefits, or the surviving parent has to work full-time immediately while grieving.
What They Actually Needed
| Protection | Amount | Purpose |
|---|---|---|
| Decreasing term | £320,000 | Pay off mortgage |
| Level term | £500,000 | Income replacement (17 years x £30k) |
| Total cover | £820,000 | Full protection |
With both policies, the family:
- Pays off the house entirely
- Has £500,000 for income replacement
- Can spread that over 17 years (until youngest is 21)
- Gets approximately £29,400/year without touching capital
Much better.
The Right Protection for Homeowners {#right-protection-for-homeowners}
The Recommended Approach
1. Decreasing term for your mortgage
- Match the cover to your outstanding balance
- Match the term to your remaining mortgage term
- Consider adding a buffer (£10-20k) for remortgage flexibility
2. Level term for income replacement
- Calculate: (Annual income x years until youngest child is independent)
- Subtract any death in service benefits
- Add buffer for childcare if applicable
3. Consider critical illness cover
- Pays out if you're diagnosed with serious illness
- You're more likely to suffer serious illness than die young
- Adds 50-100% to your premium
- Optional but worth considering
Example Package for a Family
Family details:
- Ages 35 and 37, two children
- £320,000 mortgage, 22 years remaining
- Combined income £75,000
- Death in service: 3x £45,000 = £135,000
Recommended package:
| Policy | Amount | Term | Est. Monthly Cost |
|---|---|---|---|
| Decreasing term (mortgage) | £330,000 | 22 years | £14-18 |
| Level term (income replacement) | £600,000 | 20 years | £28-38 |
| Total | £42-56 |
Less than £60/month for comprehensive family protection.
How Much It All Costs {#how-much-it-all-costs}
2026 Monthly Premium Guide
Decreasing term (mortgage cover):
| Amount | 20-year term | 25-year term | 30-year term |
|---|---|---|---|
| £200,000 | £8-12 | £10-14 | £12-16 |
| £300,000 | £12-16 | £14-18 | £16-22 |
| £400,000 | £14-20 | £18-24 | £22-28 |
| £500,000 | £18-24 | £22-28 | £26-34 |
Prices for 35-year-old non-smoker in good health
Level term (income replacement):
| Amount | 20-year term | 25-year term |
|---|---|---|
| £300,000 | £16-22 | £20-26 |
| £500,000 | £25-35 | £32-42 |
| £750,000 | £38-50 | £48-62 |
| £1,000,000 | £48-65 | £62-82 |
Prices for 35-year-old non-smoker in good health
Saving Money
- Don't over-insure - Calculate what you actually need
- Use decreasing term where appropriate - It's cheaper than level
- Lock in rates young - Premiums increase with age
- Quit smoking - Wait 12 months, then reapply for non-smoker rates
- Shop around - Use comparison sites or a broker
Joint Life vs Separate Policies {#joint-vs-separate}
Joint Life Insurance
How it works: One policy covering both partners. Pays out once on the first death.
Pros:
- Cheaper than two separate policies (usually 20-30% less)
- Simpler to manage
Cons:
- Only pays out once - surviving partner loses cover
- If you separate, dividing the policy is complicated
- Both parties must be healthy to get good rates
Separate Policies
How it works: Each partner has their own policy.
Pros:
- Both deaths result in payout
- Surviving partner keeps their cover
- Easier if you separate
- Can be tailored to each person's needs
Cons:
- Costs more (though not double - often 40-60% more than joint)
- Two policies to manage
Our Recommendation
For mortgage cover: Joint decreasing term is usually fine - you only need to pay off the mortgage once.
For income replacement: Separate level term policies provide better protection, especially if you have children. Both parents' deaths should be covered.
Frequently Asked Questions {#frequently-asked-questions}
Key Takeaways
- Mortgage insurance only pays off the house - Your family still needs income
- Use decreasing term for mortgages - It's cheaper and matches your reducing debt
- Add level term for income replacement - This covers living costs and childcare
- Consider both joint and separate - Joint for mortgage, separate for income
- Don't over-rely on lender insurance - Get proper quotes and compare
- Put policies in trust - Avoids inheritance tax and probate delays
Next Steps {#next-steps}
Last updated: January 2026. This guide is for informational purposes only and does not constitute financial advice. Insurance needs vary by individual circumstances.
Last updated: 11 January 2026