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Mortgages and life insurance
There are several different types of mortgage. Some of them only work with life insurance. For others, life insurance is not necessary, but some lenders may insist on it (depending on how much you are borrowing and on the value of the property).
The most common mortgage for which life insurance is necessary is an endowment mortgage, which cannot work without it. Other types of mortgage for which life insurance cover is usually, if not always, required are pension–linked mortgages and foreign currency mortgages.
If you already have endowment life insurance you can use it for a new endowment mortgage without any new questions being asked, provided you are not seeking to increase the sum covered in order to pay off your mortgage. For this reason, do not surrender a life insurance policy which you already have, unless you have no alternative.
Lenders often want you to take out a mortgage with life insurance because they are paid commission on the life insurance policy. But if they think you are likely to be refused life insurance, you should not apply for an endowment mortgage or any other mortgage which requires life insurance cover. This means you will need to apply for a different kind of mortgage, for example a repayment mortgage or an interest–only mortgage.
A straight repayment mortgage is available from many lenders (especially high–street building societies, or through a broker) without any life insurance cover. Sometimes, however, the lender wants you to have a mortgage protection policy as well, which pays off the mortgage if you die before all the borrowed money has been paid back.
A lender is more likely to insist on this if you are borrowing a large sum of money, or if the value of the property is nearly the same as the amount you are borrowing. But a mortgage protection policy is a form of life insurance and you should therefore not agree to apply for one if you are likely to be refused life insurance. Sometimes lenders also want you to pay for a mortgage guarantee policy, which the lender will claim on if they have to sell your property, and get less for it than they lent you: this is not life insurance and health questions will not be asked.
Apart from the question whether you will get life insurance or not, the type of mortgage you decide to go for depends on your financial position and whether there is anyone you need to provide for if you die. You should seek advice from an independent financial adviser (see Help and Advice below).
Never exchange contracts on a property purchase until all the financial details have been worked out.