What a loan insurance policy covers
Insurance for a loan is usually life insurance that pays out if you die during the term, so the loan can be cleared instead of passing to your family. Aviva describes two shapes. Decreasing cover, often called mortgage protection, falls over the policy term, typically in line with a repayment mortgage you are paying off. Level cover stays the same throughout and may suit an interest-only mortgage, because the loan stays the same until you repay it at the end of the term.
Aviva also says that if you want both a level and a decreasing policy you need a quote for each, as they are two separate policies, and that a calculator's figures are estimates before the insurer asks its detailed questions. This page follows the same idea for one loan: it works out the cover the loan itself implies and prices it with the premium you enter.
Worked example: a £150,000 repayment loan
Take a £150,000 loan at 5% over 25 years, repaid with equal monthly payments. The payment is £876.89. Cover that follows the balance starts at £150,000.00, falls to £127,877.39 after a quarter of the term, £97,658.99 halfway and £56,382.14 after three quarters.
With a quoted premium of £25 a month, your payment plus the premium is £901.89. The premium is 2.85% of the loan payment and you would pay £7,500.00 in premiums over the 25 years. Interest is worked out each month as the yearly rate divided by 12, the way mortgage rates are usually quoted.
Interest-only loans need level cover
On an interest-only loan the balance does not fall, so the cover does not either. The same £150,000 at 5% costs £625.00 a month in interest, the cover stays at £150,000.00 for the whole term, and a £25 premium is 4.00% of the payment. The calculator marks the cover as level when you choose interest-only.
Three ways to enter your quote
A monthly premium is paid with each loan payment. A premium per £1,000 of cover is multiplied by the cover at the start: £0.20 for each £1,000 on the £150,000 loan is £30.00 a month and £9,000.00 over the term. Some quotes are for a decreasing policy with a level premium, so we apply the rate to the starting cover.
A single premium added to the loan is borrowed along with it, so you pay interest on it. On a £100,000 interest-only loan at 4% over 20 years, a £3,000 single premium adds £10.00 to each payment. Because the premium itself is repaid with the balance at the end, the insurance costs £5,400.00 in all, of which £2,400.00 is interest on the premium.
What this estimate leaves out
Premiums depend on your age, health, smoking, the term and whether the policy covers one life or two, so we do not estimate them. The calculator does not value critical illness cover, premiums that rise each year, inflation protection, tax or what a policy pays out in a particular case. Your insurer's illustration and your loan agreement are the figures that count, and an adviser can say whether a policy suits you.
To price payment protection for a personal loan, use the loan protection insurance calculator.
To see how much you could borrow in the first place, use the loan affordability calculator.
Use the right country page
This page stays in pounds and uses UK terms such as mortgage protection and decreasing cover. The country choices above the inputs open separate local pages. Choosing United States opens the US loan insurance policy calculator, which uses dollars and US wording. The inputs reset and amounts are not converted.
Inputs for the loan insurance policy calculator
How the loan is repaid
Repayment means the balance falls and decreasing cover fits. Interest-only means the balance stays and level cover fits.
How your quote is priced
Match your insurance quote: a monthly premium, a monthly premium per £1,000 of cover, or a single premium added to the loan.
Loan or mortgage balance
What you owe now. This is the cover at the start.
Interest rate
The loan's yearly rate. Interest is worked out each month as the rate divided by 12.
Loan and cover term
The years the loan runs. The policy is assumed to run the same time, to a whole number of months.
Premium from your quote
The figure on your quote, read the way you chose above. We do not estimate premiums.
CALCULATOR QUESTIONS
UK loan insurance policy calculator questions
How much life cover does a loan need?
At the start, the balance of the loan. On a repayment loan, cover that follows the balance falls over time: on the £150,000 example it is £97,658.99 halfway through the 25 years. On an interest-only loan it stays at the full amount.
Should I choose decreasing or level cover?
Aviva says decreasing cover is typically in line with a repayment mortgage and level cover may suit an interest-only mortgage. Your insurer or adviser can confirm which fits your loan.
Does the calculator work out my premium?
No. Premiums depend on age, health, smoking, term and single or joint cover, so you enter the premium from your own quote. This page shows what that premium means for your payments.
What does a single premium added to the loan cost?
More than the premium itself, because you pay interest on it. In the £100,000 interest-only example a £3,000 premium costs £5,400.00 in total, including £2,400.00 of interest.
Is this a quote or advice?
Neither. It is a planning estimate from the figures you enter. Ask an insurer for a quote and an adviser if you are unsure what cover you need.
What happens if I choose United States?
The country choice opens the separate US loan insurance policy calculator, in dollars and with US wording. Your inputs are reset rather than converted.