Mortgage life insurance is designed to safeguard what is likely one of your biggest investments – your home.
Before signing up (everyone qualifies), you will want to do some digging to fully understand the fine print.
We’ll cover the important details to help you make an informed decision, including what’s good, what’s bad and possible alternatives.
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Mortgage Life Insurance Overview
It’s likely you have been inundated with offers to purchase mortgage life insurance if you recently purchased a home.
Also referred to as mortgage protection insurance (MPI), this form of coverage is not to be confused with traditional life insurance, such as a 30-year term policy.
In a nutshell, it is insurance coverage that pays your lender the balance of your mortgage if you die, and sometimes if you become disabled from an accident.
Mortgage life insurance is never required.
But, don’t respond to those mailers until you are aware of the policy’s details.
Important – banks, lenders, and private insurers all offer mortgage life insurance. Policy features and details vary depending on the provider.
1. Covers your mortgage balance
Unlike life insurance, mortgage protection insurance is specifically designed to pay off your home.
The death benefit only pays off the mortgage – nothing else.
Limits apply to the amount of coverage you can purchase. For example, if you buy a home for $300,000, your policy size (face amount) can be no more than that amount.
2. Premium payments are level
Throughout the life of the policy, your premiums (the amount you pay for coverage) will remain the same amount.
Most forms of life insurance include level premiums.
3. Decreasing death benefit
Even though your premium payments remain the same, in most cases, the death benefit decreases – in proportion to your mortgage balance.
In other words, as time progresses, the value of your policy diminishes.
This is an important detail.
In contrast, traditional term or whole life insurance include a level death benefit.
What’s the difference? If you die, 10 years into your mortgage loan, the death benefit will only be the balance of your mortgage.
Regardless of when you die with a 20-year term life insurance policy in force, the death benefit remains level – the same.
4. The beneficiary is the mortgage lender
Another important detail.
The recipient of the policy proceeds is not your loved ones. The benefit goes directly to your mortgage lender – to pay off the balance of your loan.
While there is peace of mind knowing they will not have to move or worry about making a mortgage payment, your loved ones do not receive any funds directly.
If those you care about most rely on you financially – beyond a mortgage payment – look into purchasing a traditional life insurance policy, as well.
5. Mortgage life insurance is term coverage
Your policy usually lasts as long as the term of the mortgage, like 15 or 30 years.
Once you pay off your mortgage, the policy expires.
Whole life insurance never expires – as long as you pay your premiums – and is paid directly to your beneficiary.
6. No medical exam
Mortgage life insurance is always issued without an exam.
In contrast, medically underwritten policies include a paramedical examination – bloodwork, liquid samples, blood pressure readings, and weight check.
Keep in mind, though, many life insurance carriers offer no physical life insurance. If the thought of a needle poke makes you feel queasy, mortgage life insurance is not your only option.
7. Everyone qualifies
The only requirement for mortgage life insurance is to have a mortgage.
Not only is there no exam, you won’t be asked any health questions.
Although, minimal scrutiny comes at a higher cost – just like guaranteed issue life insurance.
Why? Insurance providers absorb risk in exchange for protection. Minimal underwriting means substantial risk (e.g. serious health conditions, like cancer) is potentially absorbed.
Premiums are costlier because mortgage life insurance providers need to protect their financial integrity.
Note – in most cases, mortgage life insurance should only be considered if you do not qualify for traditional life insurance.
There are a number of additional facts you should be aware of pertaining to this form of coverage.
Mortgage life insurance is sold through different entities, each with its own contractual provisions.
- Mortgage lender
- Affiliated insurance company
- Unaffiliated insurance company (they find out you took out a mortgage via public records)
Typically, there is a certain window of time in which you can buy coverage.
Some providers require the insurance to be purchased within 24 months of closing, while others allow up to five years.
Cause of death restrictions
Be sure to read the policy’s details.
Sometimes, only specific causes of death will result in a payout, like an accidental death.
Usually, you can add a co-borrower, such as your spouse, to the policy.
If there are two names on the contract, the policy will pay off the balance of your mortgage if the second person dies.
Other types of mortgage insurance
You don’t want to confuse mortgage life insurance with other forms of coverage that also have the word, “mortgage” in the name.
The following forms of insurance can be required, depending on the type of mortgage you take out. (Mortgage life insurance is never required.)
- Private mortgage insurance (PMI) – for conventional mortgages; often required if you buy a home without a down payment of a certain percentage (e.g. 20%) of the purchase price/value of the home.
- FHA mortgage insurance premium (MIP) – for government-backed mortgages; requires initial premium and annual premium, without considering the down payment percentage.
- VA mortgage insurance – specifically for Veterans Affairs home loans, a funding fee is required for the purchase of a home, typically a small percentage of the loan amount.
- USDA mortgage insurance – from the U.S. Department of Agriculture for specific types of property (rural); that includes an initial fee and annual fee
Selling the house
If you end up moving, your policy does not necessarily follow you. That means the premiums you paid into the policy would not be recouped.
Provisions vary, so you will want to read the fine print of your policy.
What’s Good About Mortgage Life Insurance?
To be sure, there are some potential upswings to this type of coverage.
- No exam required
- No health questions
- Pays off your mortgage
- Everyone qualifies (who takes out a mortgage)
But, it only makes sense in certain situations, namely, if you cannot qualify for traditional life insurance, such as a 30-year term policy.
Why? Life insurance – like term and whole – provides money directly to your loved ones, tends to be more affordable, and offers additional policy options and features.
If you have serious health or lifestyle complications, like uncontrolled diabetes, or a history of alcoholism, traditional life insurance might be out of reach – making mortgage life insurance a sound option.
What’s Bad About Mortgage Life Insurance?
For most families, there is a lot of bad.
Any payout goes to the mortgage lender.– Forbes
Especially, if you are in good or decent health, think of the following as red flags.
- Expensive premiums
- Decreasing benefit – to match mortgage balance
- The beneficiary is the mortgage lender
- No funds paid to loved ones
If you have debts outside of your mortgage – student loan, credit cards, car loan – this form of coverage will do nothing for those liabilities.
Always evaluate all of your coverage options before signing up for a mortgage life insurance policy.
The two most common forms of life insurance recommended as an alternative are: term and whole life insurance.
Term life insurance provides the most bang for your buck.
Available in large amounts with affordable premiums, term provides coverage for a certain period of time – when you need it most.
Further, a term policy is paid directly to your beneficiaries, giving them the freedom to use the funds as they see fit.
Term comes in a large array of face amounts:
You have a number of time periods to select from, as well (as opposed to being limited to the number of years on your mortgage):
Also called permanent life insurance, whole life insurance is a form of coverage that lasts your entire life – as long as you make your premium payments.
Just like term, whole life insurance is available in a wide range of face amounts – from modest to massive.
Further, additional features apply specifically to permanent products:
- Policy loans
- Policy withdrawals
|Mortgage Life Insurance||Term Life Insurance||Whole Life Insurance|
|Policy Length||Duration of mortgage||10 - 40 years||Permanent|
|Face Amount||Mortgage balance||$25,000 - $1MM plus||$10,000 - $1MM plus|
|Beneficiary||Mortgage lender||Your choice||Your choice|
How To Buy
In a perfect world, you will own plenty of life insurance that not only covers the balance of a mortgage but also provides enough income to your loved ones.
Sometimes, that is not an option – typically due to health complications – and mortgage life insurance may be a good decision.
The best way for you to determine what your options are, and what form of coverage makes the most sense, is to collaborate with an independent agent.
Why? They will walk you through the quoting process with multiple carriers and policies. Your best interest is their best interest – not a particular carrier.
Your free quote is a great place to start.