If you’re like most people, the biggest investment you’ll ever make will be when you buy your home. It also brings with it the most considerable debt you’ll probably ever assume — your mortgage.
In the age of two-income families, many people are concerned with dying before the mortgage is paid off and leaving their heirs with the pressure of assuming responsibility for the mortgage balance. They want their family members to be able to remain in their home if they’d like and not have to sell it.
A life insurance policy’s death benefit can help keep your family in their home if you die prematurely. There is a specific type of insurance many people purchase for that sole purpose — mortgage life insurance. It’s a type of life insurance some people don’t know about, or if they’ve heard about it, they don’t totally understand it.
Let’s look at mortgage life insurance: what it is, if you need it, what your alternatives are, and more.
Mortgage life insurance (also called mortgage protection insurance) does precisely what the name implies — it pays off the unpaid balance of your mortgage should you die. Many banks and mortgage lenders offer mortgage life insurance.
Normally, you choose the beneficiary of your life insurance policy, but not with mortgage life insurance, which is why lenders like it — they’re the beneficiary of your policy.
Your family benefits if you own mortgage life insurance, but they are restricted, as well. If you owe $250,000 on your mortgage when you die, your policy will pay off the mortgage, and your family can stay in their home, but they will have no say in how the death benefit is spent.
Since most mortgages are for a 15 or 30-year term, many lenders offer mortgage life insurance that remains in force for the same number of years. The death benefit can be structured in one of three ways:
- Decreasing: As your mortgage balance decreases, so will your policy’s death benefit. The death benefit may be fixed for the first few years of your policy since almost all of your mortgage payment is made up of interest in the early years. It will then begin to decrease over the life of the policy.
- Mortgage Principal: Some mortgage life policies have the death benefit correspond with the outstanding mortgage principal. This is much like a decreasing death benefit, but if you pay off your mortgage faster than you expected, the policy’s death benefit will reflect that.
- Level: The death benefit will not decrease; it will remain the same for the life of your policy. If you have an interest-only mortgage, this may be ideal since the principal remains the same.
Some people think that mortgage life insurance is mandatory because they confuse it with private mortgage insurance, which many banks or lenders require you to purchase. Here’s the difference between the two:
- Private mortgage insurance (PMI) is different than mortgage life insurance. Your lender can require PMI if your down payment on your home is less than 20%.
- Mortgage life insurance, sometimes called MPI, short for Mortgage Protection Insurance, is optional coverage.
You bear the cost of mortgage life insurance, not the lender. You want to be sure that you don’t buy it if you’re not inclined to do so.
While mortgage life insurance is beneficial because your survivors won’t be saddled with a mortgage if you died, it does come with three primary restrictions.
- Similar to accidental death insurance policies, some mortgage life insurance policies will only pay a death benefit if you die from accidental causes. In this case, your policy won’t pay off your mortgage if you die from an illness, such as a heart attack or cancer.
- Mortgage life insurance is sometimes bundled as part of your mortgage payment. Being tied to your mortgage is restrictive since you’ll need to obtain a new policy if you were to relocate. And, your new policy will cost you more since premiums are based on your age when the policy is issued.
- Your family won’t receive any of the excess if the death benefit exceeds the mortgage balance. For example, if you take out a mortgage life insurance policy for $500,000 and you die when your outstanding mortgage balance is $400,000, the lender will receive the $100,000 difference in death benefit, not your family.
While term life policies and mortgage life policies are similar in that they expire after a set period of time, term life policies offer greater flexibility for a significantly lower premium (especially if you’re a healthy non-smoker).
If you can qualify, term life insurance is a better alternative for you because:
- You can apply for any amount of coverage. With mortgage life insurance, you’re restricted by the mortgage amount.
- You can have term life insurance for whatever period of time you’d like, whether it be for 5 years or 30 years. Mortgage life’s term is restricted by the length of the mortgage.
- With term life insurance, the death benefit is paid upon your death from an accident or illness, unlike many mortgage life policies that are limited to accidental death only.
- Term life allows you to name any beneficiary you choose (spouse, child, etc.) and not just the lender, as required in most mortgage life policies.
Mortgage life insurance can be a good alternative if you have pre-existing health conditions and are unable to qualify for a traditional policy. Many insurers offering mortgage life guarantee you’ll be accepted, or their application process only has health questions for you to answer and doesn’t require a medical exam.
Learn More: No Medical Exam Life Insurance
One other type of insurance you want to consider when you have a mortgage is disability insurance. With this type of insurance, you receive a monthly check from the insurance company if you become disabled and can’t work in your occupation. This can keep you and your family in your home for a set number of years or until age 65 (depending upon the type of policy you choose) if you become disabled from illness or injury.
Much can happen in the 15 to 30 years that you have a mortgage. Life insurance to protect your loved ones if you die and disability insurance if you’re sick or injured and can’t work are two essential types of protection you’ll need for your family’s well-being and your peace of mind. The premiums for each will increase as you get older, making it beneficial to apply as soon as you’re approved for your mortgage and before moving into your new home.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
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