When people go to the bank to enquire about taking out a mortgage, they are often surprised to be asked by the bank staff about their personal insurance.
Having the right insurance in place is often essential for obtaining a mortgage from a bank. What’s more – you may also be surprised to discover that this requirement needn’t force you to take out a new policy, as you may already be covered through your employer.
But what does insurance have to do with a mortgage? And how can your employer help you get life insurance? Let’s explore these questions in this article.
Life insurance and mortgages
When banks decide whether to make a loan, they take many factors into account. These factors could include:
- Your credit rating
- Your other borrowings
- The reliability of your income
All of these factors weigh on the odds of you being unable to make a repayment. A bank has no upside beyond you making the payments you are contractually obliged to make. However their downside is significant – if you cannot afford to keep up with repayments, they may incur significant costs to repossess your home to try and recoup the amount they advanced to you.
The reliability of your income is a critical factor. After all, you’re only likely to miss a mortgage payment if your income suddenly dries up.
From a bank’s perspective, one risk is that the borrower passes away during the mortgage term. Without a borrower, there will be no repayments, and the bank will need to wait until the estate of the deceased is settled before they can claim their money back.
In the event that the value of the property has reduced since the loan was made, the personal estate of the deceased may be insufficient to fully cover the loan plus interest. This is known as negative equity.
This is why banks ask customers to take out life insurance. This will increase the likelihood of quick and full payment if a borrower were to die. This reduces the risk to the bank, and this can be passed on in the form of cheaper mortgage rates.
Workplace Life Insurance
Fortunately, many employees already have an entitlement to life cover through their employer. Although not mandatory (and therefore not universal), many employers offer a ‘death in service’ benefit to employees.
This is usually described in your employment contract, and then never mentioned ever again, so any long standing employees tend to forget that they even have this cover.
Death in service benefits is usually calculated as a value which is a multiple of your gross wage. For example, it may pay 2.5 x your gross salary.
These are not the most generous life insurance policies in the world – often their benefits are less than £100,000. (Whereas people taking out life cover often choose policies for many times this amount).
However, speak to your bank, as this may be sufficient for their needs. Death benefit policies only apply while you remain an employee, therefore the bank may be uncomfortable that the insurance policy would become null and void if you were to voluntarily leave work or become redundant.