Mortgage protection or family protection: which cover suits you

Mortgage protection and family protection answer two different questions. Mortgage protection pays off a debt: a decreasing term policy whose payout falls over time to match what is left on a repayment mortgage¹. Family protection replaces income: a level term policy that pays a fixed lump sum, or family income benefit, which pays a regular income for the remaining years of the term².

The choice turns on what your household would need if you died. If the mortgage is the main risk and your partner could manage other bills on their own income, cover sized to the loan is usually the cheaper route, because mortgage protection life insurance is the cheapest type of life insurance². If your income pays for food, bills and childcare as well as the mortgage, a payout that only clears the loan leaves those costs unmet.

Neither is compulsory. There is no law to say that you need life insurance to get a mortgage, although some lenders say you must have it to borrow from them⁴. You do not have to have life insurance in place to get a mortgage¹.

Mortgage protection pays off a debt, family protection replaces income

The two products sit in different places in a household budget. Mortgage protection is a life insurance policy sized to a home loan. Its purpose is to clear the debt, and the payout is designed to track the balance outstanding. Family protection is about the money that keeps arriving each month: the salary that pays for everything the mortgage does not.

Family income benefit is the clearest example. It pays a regular income rather than a lump sum, and critical illness cover can be added to a life insurance policy or bought separately, providing a lump sum on diagnosis of a specified serious illness⁹. Life insurance more generally is used to pay off debts such as a mortgage and to provide money for your family¹⁰.

There is a third product that is often confused with both. Mortgage payment protection insurance is an insurance policy that covers your repayments if you become ill or lose your job¹¹. It is not life cover at all. It comes in three types: unemployment only, accident and sickness only, and accident, sickness and unemployment¹². Payments usually come to you rather than your mortgage lender, which separates it from payment protection insurance, where payments are made to the lender¹³.

That distinction matters when money is tight. Because the money arrives with you, you decide how it is spent, and income protection insurance can be used to pay for what you wish, including your mortgage¹⁴. Income protection also tends to be more expensive than mortgage payment protection insurance, and some income protection policies pay out for a longer period than mortgage insurance, for example until you can go back to work or reach retirement¹².

Decreasing or level term: how each payout behaves

The shape of the payout is the single biggest difference between the two.

With a decreasing policy, the final payout gets less over time so it matches the amount left on the mortgage¹. Decreasing term means the amount paid out decreases over the life of the policy, usually to match a decreasing debt such as a repayment mortgage¹⁵. The payout your family would receive with decreasing term insurance gets smaller over the term of the policy³.

Level term works the other way. With level term insurance, the payout your loved ones receive remains level throughout the term of the policy³. That fixed sum is what makes level cover suitable for replacing income as well as clearing a debt: the amount does not shrink as the years pass, so it can fund several years of household spending.

The practical consequence is cost. A decreasing policy pays out less over time, so it is priced to reflect that, and mortgage protection life insurance is the cheapest type of life insurance². A level policy paying a fixed sum for the same term costs more because the insurer carries more risk for longer.

One point catches people out. Paying off your mortgage does not affect your life insurance policy, which remains active until the term expires, you cancel it, or you die, with no payout on surviving the term¹⁶. If you clear the loan early, a decreasing policy has nothing left to match, but the premiums continue unless you cancel. Never cancel a policy without having secured a replacement first¹.

What each type of cover costs, from about £4 a month

Costs vary widely by product, age and health, and the figures below are examples rather than quotes.

For mortgage payment protection insurance, a 30 year old man or woman working as an administrator with monthly mortgage payments of £750 may pay around £7 a month for accident and sickness cover⁵. That is a short-term product tied to a specific monthly commitment.

For family protection, the market runs from a few pounds upward. One insurer's accident and hospitalisation product starts from £11 per month, with a monthly premium from £11 up to £55 for its core cover¹⁷. The same insurer prices four units of core cover at £44 per month and two units at £22 per month¹⁸. Optional child cover, protecting children from birth until their 23rd birthday, starts from £2 per month¹⁹.

Two structural points affect what you actually pay. First, income protection insurance tends to be more expensive than mortgage payment protection insurance¹². Second, the cheapest life cover is the decreasing kind, because the payout shrinks². A household weighing up mortgage protection against family protection is really weighing a shrinking payout against a fixed one, and the price difference reflects that.

What affects your premium: age, health, smoking and job

Premiums are based on your age, the medical information you and your doctor provide, plus your lifestyle²⁰. Any significant pre-existing medical or other health conditions that increase the risk of you dying early will also increase premiums¹.

For income protection, the costs are affected by your age, your health, your job, hobbies and lifestyle, the waiting period, and whether you might be prepared to do other kinds of work than your own²¹. Occupation matters because it feeds into how likely you are to be unable to work.

Smoking and vaping sit in the same bracket. Insurers weight premiums for people who use vapes, gum and patches the same as for those who smoke cigarettes¹⁵. You must tell your life insurer if you smoke or vape using nicotine products, even if you do so only occasionally⁶. Ex-smokers face a waiting game: some insurers only require you to have quit for a year, others for two, five or even 10 years, to be treated as a non-smoker⁶. A few insurers enable you to sign a declaration that you have given up smoking and will reduce your premiums, but most insurers will not discount an existing policy⁶.

Single or joint cover, and holding more than one policy

Joint cover puts two people on one policy with one monthly premium²². It is typically slightly cheaper to have a joint life insurance policy rather than two single policies, and a joint policy is cheaper than having a single policy each¹⁶.

The trade-off is the payout. The main disadvantage of joint life insurance is that you will get only the single payment per policy, even if the worst happens to both policyholders during the term⁸. Two single policies cost more but give double the cover, and the survivor keeps their own cover after a claim¹⁶.

Holding more than one policy is possible, and life insurance does not incur tax, though the payout would be added to the value of your estate and may then be subject to inheritance tax²⁰. Some people take out life insurance to cover the inheritance tax the family will have to pay on their estate¹.

For joint mortgage borrowers, it is also likely to be important to have mortgage protection insurance to pay off the loan if one of you dies²⁴. Where a couple has both a repayment mortgage and children, the two products are often bought side by side: decreasing cover for the loan, level or family income benefit for the household budget.

Applying: health questions, GP checks and medical exams

When you apply for an individually underwritten policy, the insurer will ask you questions about your health and ask you to declare any conditions you have at that time²⁵. You will normally be asked about your current health, previous health problems and any major health problems in your family²⁶.

You will need to make an honest declaration about all these issues, and your GP will be asked to confirm your medical conditions¹. Insurers will also check your answers with your GP²⁷. Insurance companies may request medical information from your GP or hospital doctor to better understand the condition and accurately price the additional risk²⁶.

In complex cases, insurers will often send a specialist nurse to your home for a medical examination⁶. In unusual circumstances, you may require further medical examinations before a premium can be quoted¹.

Can I get cover if I have diabetes or have had cancer?

Often yes, but on the insurer's terms. People with Type 2 diabetes, particularly if it is well controlled, will often be able to get cover, typically with higher premiums and sometimes with exclusions¹⁰. People with diabetes can buy most forms of life insurance, with level term and decreasing term the two main types¹⁰.

You must tell the insurer whether you have type 1 or type 2 diabetes or a rarer form, your HbA1c test results, hospitalisations, treatment changes and complications¹⁰. If you already have life insurance and are subsequently diagnosed with diabetes, you do not have to tell your insurer or pay higher premiums¹⁰.

For cancer, life insurance usually pays out only when you die, so a diagnosis on its own will not automatically pay anything⁶. People who have recovered from cancer may be asked to provide detailed medical information and attend a medical examination, with higher premiums and restrictions on the maximum sum insured⁶. Insurers are legally entitled to refuse cover where the medical prognosis is that you will die during the policy term⁶.

There are specialist, non-medically screened policies that offer guaranteed cover for anyone, but these are often more expensive, with limited term length or total sum insured⁶. Once a policy is in place, the premiums cannot be increased after a cancer diagnosis, and as long as you make full and honest disclosures on your application and continue paying the premiums, the policy cannot be cancelled⁶.

Does life insurance pay out for terminal illness?

Life insurance usually pays out only when you die, so a cancer diagnosis will not automatically pay anything⁶. Many life insurance policies also include terminal illness benefit, which means the policy could pay out early if a doctor says you have less than 12 months to live⁶. Not all policies include it⁶.

Single life insurance will pay out on your death or, often, if you receive a diagnosis that you have a terminal illness and will die within 12 months⁸. Terminal illness insurance, by contrast, pays out if you are diagnosed with a condition that is expected to be fatal within 12 months²⁸.

Critical illness cover is a separate product. It can be added to a life insurance policy or bought separately, providing a lump sum on diagnosis of a specified serious illness⁹. Some policies pay out if you are covered for life insurance for terminal illnesses, mortgage payment protection, critical illness cover or income protection insurance²⁹.

When a policy will not pay out

The exclusions are where most disputes start. Many mortgage payment protection policies will not pay out until a few months after you are unable to work, and then for no longer than a year or two³⁰. The insurance payments may not start straight away, so contact your insurer as soon as possible³¹.

Many policies will not cover you in certain circumstances, for example if you are self-employed, over retirement age or have a medical condition³². Payment protection insurance is not suitable if you are self-employed or have already been diagnosed with an illness³³.

Missed premiums are the other common failure. A lapsed policy does not pay out, and you run the risk of losing your home if you do not keep up your mortgage payments³⁰. If arrears arise because of illness or a medical condition which may prevent you from working or making payments for a period of time, bring a letter from your GP, consultant or medical social worker explaining your condition³⁵.

Where a complaint is not resolved, the Financial Ombudsman Service handles disputes about pre-existing medical conditions and how insurers applied them²⁵. Free, impartial help is available from MoneyHelper and from debt advice charities such as StepChange and National Debtline.

Putting the policy in trust so your family is paid sooner

Writing a policy in trust changes who receives the money and when. Life insurance payouts are not subject to income tax or capital gains tax⁷. But life insurance does not incur tax while the payout would be added to the value of your estate, so it may then be subject to inheritance tax²⁰. Life insurance payments are not taxed, but may be added to the value of your estate and subject to inheritance tax unless written in trust³⁶.

The trust route solves both the tax point and the delay. Payment into trust means your family receives the money sooner, as they will not have to wait for the often-lengthy probate period to be completed, and it also means the payment does not form part of your estate so is not subject to inheritance tax². The policy benefit does not go through probate when it has been written into trust and therefore can be paid out more quickly²². You could write the policy into trust, which means the insurance will pay directly to your named beneficiaries¹⁶.

There is a further protection. The policy benefits may have better protection from creditors of your estate should it be placed in trust²². If you die during the term of your mortgage life cover policy, the payout could be part of your estate and make it subject to inheritance tax¹⁶.