Key Takeaways
- Mortgage life insurance repays the mortgage if the borrower dies during the loan term.
- The policy amount decreases annually to match the reduced mortgage balance.
- Two types of mortgage life insurance exist: decreasing term insurance and level term insurance.
- This insurance can be advantageous for those with preexisting medical conditions that make traditional life insurance difficult to obtain.
- Mortgage life insurance can offer additional coverage for disability or inability to work, unlike most traditional life insurance policies.
What Is Mortgage Life Insurance?
Mortgage life insurance is a term policy that pays off a borrower’s mortgage if they die, with the benefit going directly to the lender while the loan is still active. Unlike traditional life insurance, it doesn’t pay a chosen beneficiary and often uses a decreasing benefit that matches the shrinking mortgage balance. Policies may be decreasing or level term, and they can be easier to qualify for, but borrowers should review costs and terms carefully before purchasing.
Types of Mortgage Life Insurance Explained
There are two main types of mortgage life insurance: decreasing term insurance, where policy size shrinks with the mortgage balance until both are zero, and level term insurance, where the policy size remains constant. Level term insurance would be appropriate for a borrower with an interest-only mortgage.
Before buying mortgage life insurance, a potential policyholder should carefully examine and analyze the terms, costs, and benefits of the policy. Remember, there are two lifespans to consider—the lifespan of the policyholder and the lifespan of the mortgage. It’s also important to investigate whether one could get the same level of coverage for your family at a lower cost—and with fewer restrictions—by buying term life insurance.
Important
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.
Key Benefits of Mortgage Life Insurance for Homeowners
Mortgage life insurance provides near-universal coverage with minimal underwriting. There is often no medical examination or blood sample required and can 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, heirs won’t have to worry or wonder what might happen to the family home. If a policyholder dies or becomes gravely ill and unable to work, the mortgage life insurance policy will pay off the entire mortgage loan.
- 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 their family having a place to live if they die or cannot work. With the mortgage paid off, the family will always have a place to live, provided they can afford the property taxes and insurance each year.
The Bottom Line
Mortgage life insurance pays off a borrower’s mortgage if they die, with coverage offered as decreasing term for standard loans or level term for interest-only mortgages.
It often requires no medical exam, making it accessible for people with health issues, but it differs from traditional life insurance by protecting the home rather than providing broader financial support. Borrowers should assess their needs to decide whether this type of coverage is the right fit.