A guide to understanding insurance in relation to your mortgage

A guide to understanding insurance in relation to your mortgage

Your home is likely to be the most expensive thing you will ever buy so in this guide we explain the importance of having the appropriate insurances in place as well as the risks homeowners undertake by being either underinsured or uninsured. At Mortgagez we can help with all of your insurance requirements so please do not hesitate to speak to one of our advisers on 0330 1331 030 if you require further information on any of the items covered below. 

There are many types of insurance that homeowners should consider, depending on their personal circumstances. These include: 

  • Buildings and contents insurance 
  • Life insurance 
  • Critical illness cover 
  • Income protection 
  • Accident, sickness and unemployment cover 
  • Private medical insurance  

Starting with buildings and contents insurance, the former is usually a mandatory requirement if you are buying a property with a mortgage and it must be in place from the point at which you exchange contracts (purchase). Many people do not realise this and think it just needs to be in place when you complete on the purchase (i.e. the keys are handed over).  

When you exchange, you legally commit to purchasing a property so it definitely makes sense to assume responsibility for insuring the property from this point onwards. The seller’s own buildings insurance is also usually cancelled at this point so don’t make the mistake of sourcing this insurance at the last minute when you’ll most likely be busy with other things and may not end up getting the best deal. Contents insurance is also advisable and is often offered at a discount when bought from the same provider as buildings cover. It is important to value the contents of your home as accurately as possible on a regular basis so as not to fall victim to an ‘average clause’.  

The ‘average clause’ explained: For instance, if the contents of your home is £20,000, but you have given a value to the insurer of £10,000 (50% of the true value), you may not receive the value you claim for in the event of a theft. If you claim £5,000, but the insurer finds you to have underinsured the contents of your home by 50%, even though this figure is far below the £20,000 you have valued, the insurer may activate an ‘average clause’ and only pay £2,500 (50% of the total claim) as that’s what you have deemed to have been underinsured by. In essence, you do not stand to gain by not paying enough for your contents insurance, in the event of a claim.  

Things to consider when valuing your home contents insurance requirements are laptops, jewellery, electronics, bicycles and watches. The best practice is to go through your home, room by room, noting down any items you would wish to claim for if stolen or damaged.  

Another thing to consider when taking out contents insurance is the ‘single item limit.’ Many insurance companies will only pay out a certain maximum, usually around £1,500, for a single item. Make sure therefore to clarify this before taking out a policy and speak to your provider if you have any specific requirements or items which exceed their normal ‘single item limit.’ 

A similar approach applies to life insurance. Life insurance exists to protect your loved ones financially if you were to pass away. Say you have £100,000 left to pay on your mortgage, but are only covered for £50,000; this would not cover the debts let alone monthly outgoings so it’s important to ensure you are adequately covered. It’s also worth remembering to update your policy if your financial commitments change, such as moving to a more expensive property. Choosing life insurance first starts with an agreed budget. It is then prioritised based on covering the full mortgage debt with life insurance, then adding full/partial critical illness cover and protecting income (see below for more detail on these).  

Critical illness cover stands to protect your financial buoyancy should you fall critically unwell. Conditions that are covered by critical illness can include stroke, heart attack, some types of cancers as well as debilitating conditions such as multiple sclerosis. Some policies will also cover you by making a smaller payment for less severe illnesses though this is worth checking with your specific provider. Unlike life insurance, critical illness cover is paid before death to help cover your expenses as a result of a critical illness putting a homeowner out of work.  

As a homeowner, it would be wise to be prepared for the worst, not to mention the peace of mind knowing that if you were left unable to work, your cost of living may still be covered. As always, check with specific providers and make sure to get a policy that covers all of your personal needs.  

Income protection works in a similar way, the main difference being that critical illness cover is paid out as one lump sum, and income protection is paid out as a predetermined portion of a homeowner’s income, if left unable to work. 

Accident, sickness and unemployment cover (ASU) is another type of insurance that covers you in the event of falling ill or having an accident which then means you cannot work for an extended period of time. Income protection is very similar and is often used as the umbrella term for this type of cover. If you are involuntarily made redundant an ASU policy can also cover you while you are looking for a new job. This type of policy usually covers you for a fixed amount over an agreed period of time (usually up to a maximum of 12 or 24 months). Unemployment cover can also be obtained as a distinct type of cover on it’s own if you require this separately.     

Private Medical Insurance (PMI) is designed to cover the cost of private medical treatment for certain medical conditions occurring after your policy has commenced. The main advantage of PMI is that it usually gets you any treatment quicker and often avoids lengthy waiting lists. Depending on the level of insurance you take out, it also gives you access to a wider choice of specialist treatments and you often have a choice of private hospitals with your own room and private facilities. Overall PMI gives you peace of mind that should you need treatment quickly you’ll be able to get it.   

Here are Mortgagez, we can help and advise you on all types of personal insurance relating to your mortgage and property, so please feel free to ask one of our advisers for a quote. 


Any guidance and/or advice contained within this document is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK. Any technical or regulatory information contained within this document was correct at the time of producing it but as it may be subject to change it should not be exclusively relied upon when making a financial decision. 

Article written July 2020. 071220 MZ000149 

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