Why interest-only mortgages need level cover
With a repayment mortgage, your outstanding balance reduces over time — so decreasing term cover makes sense. With an interest-only mortgage, you're only paying the interest each month, and the capital balance stays the same throughout the term. If you die, your family still owes the original loan amount.
How much life insurance do I need?
At minimum, the sum assured should equal your outstanding mortgage balance. For example, a £250,000 interest-only mortgage requires at least £250,000 of level term cover. You should also consider additional cover for income replacement and family expenses beyond just clearing the mortgage.
How long should the policy last?
Your life insurance should run at least as long as your mortgage term. If your interest-only mortgage runs until age 70, your policy should too.
What about the repayment vehicle?
Interest-only mortgages require a separate "repayment vehicle" (investment, ISA, endowment, etc.) to repay the capital at the end of the term. Life insurance ensures the mortgage is repaid if you die before the term ends.
Can I use decreasing cover for part of my mortgage?
If you have a part-repayment, part-interest-only mortgage, you could use decreasing cover for the repayment portion and level cover for the interest-only portion — though a single level term policy covering the whole balance is simpler.
Frequently Asked Questions
No — decreasing cover reduces over time, but an interest-only mortgage balance stays constant. You need level term cover equal to the full mortgage balance.
If you switch, your existing level term policy still provides sufficient (or more than sufficient) cover. You don't need to change it, though you could consider reducing it to lower premiums.