Can you Combine Mortgage Protection and Life Insurance on one Policy?

I’m not a betting man, but I’d bet a pound to a penny (or a euro to a cent) that you’re on the road to owning your very own home.

Very exciting!

But let’s hold off on the clinking glasses and welcome mats for now.

Because there are many other less exciting, some might even say boring, things that go hand in hand with purchasing a property.

It’s not as easy as firing cash at the vendor and then walking away with the keys.

I wish it were.

But alas, you’ll need to sort out legal fees, stamp duty, and even insurance.

That last one is where we can help, so again, betting, that’s why you’re here.

So let’s look at the insurance side of things.

By the way, we’re going to swerve house insurance in this article but be aware you’ll need it (unless you’re buying an apartment that’s already insured).

At this stage, you’ve probably heard about two different types of insurance.

Life insurance and mortgage insurance.

And you’re probably wondering, do you need life insurance and mortgage protection, life insurance only, or just mortgage protection on its ownio.

So let’s have a quick review of both to catch you up.

Explain Mortgage Protection to me (the one that reduces over time)

This one here is mandatory if you’re getting a mortgage (unless you can get a waiver)

Mortgage protection protects the big bank boys first and foremost and is why we affectionately call it bank’s arse insurance.

The last thing the man in the suit wants is you popping your clogs with a good 200k left on your mortgage. No one at the Bank of Mortgage will be happy with that kind of financial loss.

So mortgage insurance is a safety net for the bank that guarantees regardless of what happens to the person who holds the mortgage loan, they’re getting their money back without having to go through the whole kicking you out of your gaff and selling it from underneath you.

Repossession is not a good look for any lender.

But what if there’s two of you on the mortgage. Well, mortgage protection works on a joint life, first death basis if you buy your policy from the bank.*

So if your partner passes away before yourself, the mortgage gets paid off.

Now don’t go getting any ideas. It may be tempting if they keep putting dirty plates in the sink, expecting you to wash them. I understand the temptation, but it is still pretty illegal. Do you feel me?

Murderous intent aside, it’s pretty shit that you have to fork out extra wonga to keep the bank happy, but it’s the way this game works.

*However, if you buy from a broker 👋, you can get dual life mortgage protection (double the cover for a lower price!)

Moving onto the next type of insurance you will have heard of

Explain Life Insurance to me (the one that doesn’t reduce over time)

Unlike mortgage insurance that protects the bank, life insurance protects your family should you shuffle off unexpectedly.

I suggest that everyone with kiddos, who can get life insurance, should do just that. There’s nothing quite like the sleep you get when uncertainty is a little more certain.

What do I mean by that?

Well, with life insurance, if you pass away, you will leave behind a sizeable stash of cash for your family, your kids, etc., to keep them financially afloat as a one-income family.

That mortgage still gets paid, there is food on the table, and the lights stay on.

Not the type of relief to be scoffed at.

So, your next question might be

can I combine these two policies into one?

Well, you can, but it can have a serious drawback if you don’t plan it well.

Let’s take Sandra, for example.

Sandra has just bought a house for herself and her beautiful family and decides to go all out on life insurance (remember, it’s the one that doesn’t reduce over time). She kicks off a 300k policy that matches her 300k mortgage safe in the knowledge that when she passes away, her policy will pay a good chunk of the mortgage and leave a nice lump sum to her family.

She has a life free of any serious health issues and passes away with 250 k of her mortgage already paid off. 50k of the life insurance policy pays off the remaining mortgage, and a dandy 250k goes to her husband to help him and the kids financially

However, life insurance is all about protecting the what-ifs:

What if Sandra didn’t make it to the grand old age of 70 and died in a car accident only a year after she bought the family abode. Now, this is a whole other scenario.

That mortgage has barely begun to shift downwards, so the entirety of her life insurance payout goes straight to the bank. Sandra’s family,  safe in the knowledge that their home won’t be repossessed, have been left in the uncomfortable position of managing daily life on a single income if her husband can get a job. He was a stay at home parent before her passing.

A little scary, right!?

So how can you avoid this major snag while ensuring you only have one insurance payout every month instead of two?

I have two options to avoid Sandra’s little snafu.

1. The old life insurance and mortgage protection one-two.

Take out two policies, one mortgage protection and one life insurance.

Keep your mortgage protection for your home. You’re fully safe in the knowledge here that this little number will pay off your mortgage, keeping the banks happy as Larry and off your back, should the terrible happen.

Then have your life insurance policy to protect your family and their future.

This way, you are protected from both sides no matter what happens.

If you pass away, your mortgage protection clears your mortgage, and your life insurance pays an agreed tax-free lump sum of cash to your loved ones.

2. Kick your life insurance policy into stratospheric excess

Dramatic, 100%.

It doesn’t need to be the largest life insurance policy. You don’t want to go and financially cripple yourself with your monthly insurance payouts for no reason.

But if you want to consolidate those insurance payments onto one policy, you’ll need to ensure your life insurance policy is for far more than your mortgage could ever need.

Confused?

Don’t worry; an example should help.

If your mortgage is for 300k and you think you need 500k for your life insurance policy alone, you’ll need to buy your life insurance policy for 800k in total.

It makes sense, right? All you are doing is working out what you need from both insurances, adding them together, and bobs your uncle. You have your new life insurance policy amount.

And yes, you don’t need mortgage insurance if your life insurance payout is enough to pay off the remainder of your mortgage.

Your lender will accept either mortgage protection or life insurance if the cover amount and term are greater than or equal to the cover amount and term on your loan offer.

Capiche!

Which option is better?

I recommend two separate policies.

There are a couple of major drawbacks in combining life insurance and mortgage protection on the same policy.

The first is that the bank will become the beneficial owner of all benefits under the policy.

So let’s say you take out a life insurance policy for €500k with €50k serious illness cover and assign this to the bank for your mortgage.

If you have to claim the critical illness part of your policy, the money will go directly to the bank; you won’t see a cent even if you need it for life-saving surgery.

The second is that it may cost more depending on the term of your mortgage.

Let’s say the mortgage term is 30 years, and your youngest child is 8.

If you were taking out two policies, I would recommend 17-year life insurance to protect your youngest until they are 25 and a mortgage protection policy for 30 years.

But if you took out one life insurance policy, it would have to run over 30 years to match the mortgage and satisfy the bank.

The premiums on a 30-year life insurance policy will cost more than a 17-year life insurance policy + a 30-year mortgage protection policy.

Over to you

So, you can combine life insurance and mortgage protection on one policy, but we recommend you don’t.

Instead, give the banks as little as possible (mortgage protection) and build a family protection plan on the side using life insurance, income protection and maybe critical illness cover.

If you’d like my help creating a plan that suits where you are in life, please complete this questionnaire, and I’ll be right back with some options.

Thanks for reading

Nick