What Is Mortgage Life Insurance?
A mortgage life insurance policy is a term life policy designed specifically to repay mortgage debts and associated costs in the event of the death of the borrower.
These policies differ from traditional life insurance policies.With a traditional policy, the death benefit is paid out when the borrower dies.However, a mortgage life insurance policy does not pay unless the borrower dies while the mortgage itself is still in existence, and where the beneficiary is the mortgage lender. The term of the life insurance policy matches that of the mortgage, and the death benefit is usually reduced each year to correspond with the new amortized mortgage balance outstanding as mortgage payments are made.
Key Takeaways
- A mortgage life insurance policy pays a death benefit to the lender if a home borrower dies during the term of a mortgage loan.
- These term policies are structured to match the number of years remaining on a mortgage, with death benefit amounts that adjust annually to reflect the reduced mortgage balance left after each year.
- Borrowers who are required by their lender to take out mortgage life insurance may also elect permanent life insurance, where they are able to name new beneficiaries after the mortgage obligation has been satisfied.
Understanding Mortgage Life Insurance
There are two basic types of mortgage life insurance: decreasing term insurance, where the size of the policy decreases with the outstanding balance of the mortgage until both reach zero; and level term insurance, where the size of the policy does not decrease. Level term insurance would be appropriate for a borrower with an interest-only mortgage.
Before buying mortgage life insurance, a potential policyholdershould carefully examine and analyze the terms, costs, and benefits of the policy. Remember, there are two lifespans to consider—the lifespan of the policyholderand the lifespan of themortgage. It's also important to investigate whether onecould get the same level of coveragefor your family at a lower cost—and with fewer restrictions—by buying term life insurance.
Mortgage life insurance should not be confused with private mortgage insurance (PMI), a product often required by people who take out a mortgage for less than 80% of the value of their home.
Advantages of Mortgage Life Insurance
Mortgage life insurance providesnear-universal coverage with minimal underwriting. There is often no medical examination or blood sample required andcan be a valuable insurance policy option for any homeowner with serious preexisting medical conditions which, would prevent them from buying traditional life insurance.
Other advantages include:
- With a mortgage life insurance policy in place, heirswon’t have to worry or wonder what might happen to the family home. If a policyholderdies or becomes gravely ill andunable to work, themortgage life insurance policy willpay off the entire mortgageloan.
- With some exceptions, most traditional life insurance policies will not pay out unless you die within your coverage period. Most mortgage life insurance policies, on the other hand, offer coverage that works if you become disabled or unable to work, which makes this type of insurance a bit more versatile than a traditional term or whole life policy.
- This coverage relieves a policyholder's worries about theirfamily having a place to live if they die or cannot work. With themortgage paid off, thefamily will always have a place to live, provided they can afford the property taxes and insurance each year.
