What’s Mortgage Life Insurance? And Do You Need It?

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Chief among the most significant decisions you’ll ever make is the purchase of a new home. It’s an exciting time when you find your dream home and move in. Despite the new digs, the reality hits many people when their first mortgage payment comes due.

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If you have a family, you probably don’t want to leave that large mortgage payment behind when you die, especially if your income helped make the payment every month. For that purpose, a life insurance product called “mortgage life insurance” was developed.

This article will examine what mortgage life insurance is, how it works, its costs, alternatives to buying it, and more. By the end, we’ll have answered the burning question you probably have – “Do I need it?”

What Is Mortgage Life Insurance?

Mortgage life insurance, also called “mortgage protection insurance,” refers to life insurance designed to pay off your outstanding mortgage balance if you die while you still have a mortgage. Its primary purpose is to allow your loved ones to remain in their home when you die and not be saddled with a mortgage payment. By definition, it covers only your mortgage, and is not something that is more flexible like life insurance, which can help address responsibilities for funeral costs and the like.

Mortgage life insurance is often offered by mortgage lenders or banks, who are very fond of these policies because the payout comes straight to them when you die, not to anyone else first. This also ensures that they won’t suffer a financial loss if you still owe them money when you pass away.

The downside of the lender receiving payment directly from the life insurance company is if you die when the death benefit exceeds the outstanding mortgage balance, the lender will receive the overage, not your family.

How Does Mortgage Life Insurance Work?

So many companies offer mortgage life insurance that the benefits and structure can vary significantly. Policies have a specified term of coverage, generally, 15 or 30 years, which corresponds with the length of your mortgage. There are three ways the death benefit can be structured:

1. Decreasing

Though it may be fixed for the first few years, the policy’s death benefit decreases at a specified rate over the policy's life, mirroring the rate at which the mortgage is to be paid off. For example, if your outstanding mortgage balance decreases by 2 percent in year three, the death benefit of your mortgage life insurance policy will also decrease by 2 percent in year three.

2. Mortgage principal

Policies structured this way tie the death benefit amount to the outstanding mortgage principal. It’s closely related to the decreasing death benefit, but if you pay your mortgage off faster or slower than you expected, the policy tends to reflect that.

3. Level

If you have an interest-only mortgage where you have a set amount of time to pay off the interest, this type of policy may be perfect for you. The death benefit remains the same throughout the life of the policy since the principal also remains the same.

How Mortgage Life Insurance Policies are Priced

Mortgage life insurance policies are more expensive than traditional term life policies because most policies are “simplified issue” or “guaranteed issue,” meaning you don’t need to have a medical exam before purchasing them. Because of this, life insurance companies price these policies higher because they’re at greater risk by not knowing your medical history.

If you have pre-existing health conditions that have prevented you from getting a traditional term life insurance policy issued, mortgage life insurance can be a viable option for you. 

Because these policies have limited underwriting, insurers regularly limit death benefits to a maximum of $250,000. With the median price of homes exceeding $400,000, your mortgage life insurance policy probably won’t be enough to cover your mortgage and would necessitate you having a second policy to cover the difference.

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What Are the Pros and Cons of Mortgage Life Insurance?

Like any type of life insurance product, mortgage life insurance has its pluses and minuses. 

The pros of mortgage life insurance include:

  • It’s convenient. It mirrors your mortgage balance.
  • No medical exam is required.
  • Financially protects your family if you’ve been declined when you applied for traditional life insurance.
  • Locks your loved ones into paying off the outstanding mortgage balance, even if they think other bills and needs are more pressing.
  • It supplements other life insurance you own, whether individually or through an employer. The mortgage life insurance policy would pay off the mortgage balance, and your family could use your additional life insurance to pay for bills and other expenses.

Mortgage life insurance also has its shortcomings:

  • Your family wouldn’t have access to the death benefit if there were a severe need for money after you passed away.
  • There is a declining payout. The premiums will remain the same throughout the term of the policy, but that premium can be much higher than you would pay for a level benefit term life insurance policy. 
  • Premiums are much higher with mortgage life insurance than term life insurance because of the limited underwriting.
  • The death benefit is capped.

Who Typically Needs, or Doesn’t Need, Mortgage Life Insurance?

Simply put, it is to most people’s benefit to get some type of life insurance that helps cover a new mortgage.

There are some mortgage life insurance policies that will only pay the death benefit if you die due to an accident, not an illness. In this case, if you die from natural causes such as cancer or a heart attack, your policy would not pay out. This type of policy costs less than one that pays in the event of death from natural causes and is sometimes suitable for younger people in excellent health.

Who may need it

Anyone who is purchasing a home for the first time. Some lenders will tie your mortgage life insurance policy to your home and make it part of the mortgage payment. This means you’ll need to get a new policy if you move at a future date, and you’ll pay more at that point because you’re older than when you took out the initial policy.

However, mortgage life insurance that’s bundled into your mortgage payment is restrictive in the respect that you can’t elect to cancel your coverage if you no longer need it. For example, if you purchased a policy to ensure your spouse could keep the home after you died, but you later got divorced, you would have to continue to pay for a benefit you no longer need.

In addition, anyone who has been declined traditional term life insurance would benefit from having a mortgage life insurance policy, as no medical exam is required for it.

Who may not need it

Those who have already qualified for a traditional or term life insurance policy. Your beneficiaries will have the option to spend the money received from the payout on their own terms. These types of policies are also cheaper on the whole, as insurers are able to get more information about your health and medical status and can assess the risk accordingly.

Are There Any Good Alternatives to Mortgage Life Insurance?

If you can medically qualify for a standard, traditional life insurance policy, you will likely get a lot more coverage for less money with a term life insurance policy. Term life policies don’t have a capped death benefit, and the payout goes to your family, not your lender. This gives your family the flexibility to decide how they want to spend the money. They may decide that they wish to pay off other bills, like college costs, rather than the mortgage. 

A term life policy gives you options. it lets you choose your coverage amount and policy length, which you can’t do with mortgage life insurance. You can line your options up with your mortgage if you want to, but you’re not forced to do that.

Permanent life insurance policies, like whole life or universal life, are more expensive than term life policies, but they have a savings component as part of the policy called “cash value.” You can borrow this money if you need it, with the outstanding balance being deducted from the death benefit when you die. Also, permanent life insurance won’t expire as a term policy will; you can keep it your entire life.

Frequently Asked Questions: Mortgage Life Insurance

Is mortgage life insurance required?

This is an area that confuses many people and leads some people to buy coverage they don’t need. It is important to remember that mortgage life insurance is not required. It’s not the same thing as private mortgage insurance, which many lenders require.

It’s easy to get the two confused because of the acronyms and terminology:

  • Mortgage protection insurance (MPI) is a type of credit life insurance. It pays your creditor (the lender) when you die, not the beneficiaries you choose. The law prohibits credit life insurance from being required by lenders.
  • Private mortgage insurance (PMI) is totally different. Your lender can require it if your down payment on your home is less than 20 percent of the cost of the home.

There are several other types of insurance that you may hear about when you’re taking out your mortgage. They’re sometimes bundled together, but they’re quite different from each other.

For example, there is mortgage disability insurance, which covers your mortgage, or a portion of it, should you become totally disabled due to illness or injury. Then there is mortgage unemployment insurance, and that can help you cover your premiums if you’re unemployed for a specified period of time.

Is mortgage life insurance the same thing as life insurance?

Yes and no. Similar to life insurance policies, mortgage life insurance pays out a death benefit when the policyholder dies, but the lender, not your family, receives the death benefit. Mortgage life insurance could be considered a limited type of life insurance with more specific rules than traditional life insurance policies—like who gets the payout and what the dollar amount is.

Are riders available for mortgage life insurance policies?

There are several riders you can add to your mortgage life insurance policy:

  • Living benefits rider: With this rider, you can access a portion of the death benefit if you are diagnosed with a terminal illness, often defined as a life expectancy of 12 months or less.
  • Return of premium rider: This rider returns the premiums you paid to the life insurer after a specified number of months, which will be specified in your policy. You’ll pay an extra premium for this rider.

Both of these riders are typically available with traditional term life insurance policies.

Will You Need Mortgage Life Insurance?

Mortgage life insurance can meet your needs if you can’t medically qualify for term life insurance. However, obtaining a term life insurance policy is a much better value because you can get a much larger face amount if you’d like to for a fraction of the cost of mortgage life insurance.

Having either option available can be ultimately helpful for those focused on end-of-life and estate planning. You can also rest easy knowing that you can make it easier for your loved ones after your death with this one bit in place.

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