What would happen if you passed away today, tomorrow, or next year?
Would your family have enough money to get by, or would they struggle financially?
Would they be able to stay in your current home with the same standard of living, or would they need to downsize?
These are essential questions to ask yourself as you determine whether your life insurance coverage is sufficient.
Table of Contents
- Mortgage Life Insurance Protects Your Largest Investment
- What Is Mortgage Life Insurance?
- Types of Mortgage Life Insurance
- Why do you have to sign waivers to decline a mortgage life insurance policy?
- Is mortgage protection life insurance worth the cost?
- Advantages of Buying Mortgage Life Insurance
- 1. Minimal Underwriting
- 2. The Payoff is a Mortgage-Free Home
- 3. You Don’t Have to Die to Take Advantage of this Coverage
- 4. The Sleep-well Factor is Real
- Disadvantages of Buying Mortgage Life Insurance
- 1. Mortgage life insurance is a decreasing benefit.
- 2. Mortgage life insurance policies benefit lenders more than the insured party.
- 3. You have no control over where the life insurance settlement goes.
- 4. Mortgage life insurance premiums are expensive for the amount of coverage.
- Should You Buy Mortgage Life Insurance?
- How Much Does Mortgage Life Insurance Cost?
- Pros & Cons of a Mortgage Life Policy
- Why Most Families Would Gain from a Term Life Insurance Policy Instead:
- 1. Term Life insurance is usually cheaper
- 2. You’ll get a fixed payout
- 3. You can get much more coverage with a Term Life policy
- 4. You won’t be penalized for paying off your mortgage faster
- 5. Term Life policies pay your beneficiaries with cash
- Get a Free Term Life Insurance Quote
Mortgage Life Insurance Protects Your Largest Investment
With the average home price today, a mortgage is one of the family’s largest investments. It can lock you in for the next 30 years of your life or more.
Buying a life insurance policy is only part of what is required to protect your family.
To protect your family if you predecease them, you have to buy enough life insurance to cover your income, pay for future expenses like college and retirement, and even pay for the home you live in (even if it’s not all at once).
Life insurance policies exist to help provide money for these situations. One particular life insurance option was explicitly created to repay your mortgage in the event of your death, disability, or some life-altering disease.
Called mortgage life insurance, this type of insurance can pay off your mortgage if you meet an early death or your health impacts your ability to earn.
Keep reading to learn more about mortgage protection life insurance coverage, how it works, and what it could mean for you and your family.
What Is Mortgage Life Insurance?
A mortgage life insurance policy is a term life policy that repays mortgage debts and associated costs if the borrower dies.
Unlike a traditional life insurance policy which pays the death benefit when the borrower dies, a mortgage life insurance policy does not pay unless the borrower dies while a mortgage is still in existence. Also, the beneficiary must be the mortgage lender.
The term of the policy matches the length of the mortgage. So if you have a 15-year mortgage, this type of policy would also be 15 years.
The death benefit reduces each year to correspond with the new amortized mortgage balance outstanding as mortgage payments are made.
Types of Mortgage Life Insurance
There are two basic types of mortgage life insurance:
Decreasing term insurance is a policy where the size of the policy decreases with the outstanding balance of the mortgage until both reach zero.
Level-term insurance is a policy where the size of the policy does not decrease.
You are often offered a mortgage insurance policy when you fill out loan papers for your house and sign the paperwork to begin your mortgage.
You can decline this insurance when it is offered. However, you may be required to sign several forms and waivers verifying your decision to opt-out.
Why do you have to sign waivers to decline a mortgage life insurance policy?
Officially, this paperwork was created to prove you understand the risks associated with having a mortgage.
However, the paperwork was primarily created to give you a moment to stop and think about your situation – and potentially persuade you into buying the financial protection these policies offer.
Is mortgage protection life insurance worth the cost?
As with anything else, there are pros and cons to purchasing these policies. While it may be ideal for some families, others don’t need mortgage protection.
Before we go any further, let’s discuss the advantages and disadvantages of buying mortgage protection coverage.
Also, we’ll discuss some alternative types of insurance policies that might make even more sense to protect your loved ones.
Advantages of Buying Mortgage Life Insurance
Mortgage life insurance policies give your family peace of mind.
If you have a terminal illness or an untimely death, your mortgage life insurance plan will cover your loan amount so your loved ones won’t have to continue paying without your income.
The most significant advantage of this protection is knowing your mortgage loan will be fully repaid no matter what happens with your health.
1. Minimal Underwriting
One of the most significant advantages of buying a mortgage life policy is near-universal coverage with minimal underwriting. There is often no medical examination or blood sample required at the inception of your plan.
Thus, it can be a valuable insurance option for any high-risk homeowner with serious health problems or preexisting medical conditions that may prevent them from buying a traditional life insurance plan.
2. The Payoff is a Mortgage-Free Home
Your family will have a mortgage-free home if you die or cannot work due to illness or injury. If your mortgage payment makes up a substantial part of your monthly budget, it’s smart to consider how your family might cover the cost if you die or become incapacitated.
With a mortgage insurance policy, you won’t have to worry or wonder what might happen. If you die or become gravely ill or unable to work, your insurance plan will become active and pay off your mortgage loan.
3. You Don’t Have to Die to Take Advantage of this Coverage
With some exceptions, most traditional life insurance policies will not pay out unless you die within your coverage period. On the other hand, most mortgage insurance policies offer coverage that works if you become disabled or unable to work.
This fact makes this coverage slightly more versatile than a traditional term or whole life insurance policy.
4. The Sleep-well Factor is Real
Buying a mortgage life policy can help you to sleep well at night, knowing your family is protected. As we said before, this coverage’s most significant advantage is that you don’t have to worry about your family having a place to live if you die or cannot work.
With your mortgage paid off, your family will always have a place to live, provided they can afford the property taxes and insurance each year.
Disadvantages of Buying Mortgage Life Insurance
Generally speaking, there are four reasons why mortgage life insurance isn’t a good deal for everyone.
The most important is that you can get a comparable term life insurance policy that will cover the cost of your mortgage and provide cash death benefits for your family – all for around the same price or even less in most cases.
1. Mortgage life insurance is a decreasing benefit.
Mortgage life insurance features level premiums with a decreasing death benefit because the payout is generally fixed to your mortgage principle*. Because of this, the policy’s value decreases as you repay your mortgage loan.
On the other hand, buying a standard term life insurance policy gives you a fixed premium and a fixed payout. You know how much will be paid if you or your loved one dies.
*Some newer policies payout at a fixed rate for the first few years, then decrease as time goes on, and some payout at a fixed rate. Read the terms closely before making a purchase.
2. Mortgage life insurance policies benefit lenders more than the insured party.
Your family will not see any of this money from this insurance policy payout. The mortgage lender is the beneficiary, and if you die, the banking institution will receive the life insurance payout, which will be used to repay the mortgage in full.
Your family’s payoff is a house paid in full.
3. You have no control over where the life insurance settlement goes.
As mentioned above, the life insurance settlement is automatically sent to the bank to cover the mortgage terms. Not having a mortgage may give you peace of mind, but it may not actually be the best use of your funds at the time.
A traditional term life insurance policy gives you better control over how to use your life insurance settlement. For example, if you have a lot of debt at a higher interest rate, it may be more prudent to repay the debt before repaying your mortgage.
4. Mortgage life insurance premiums are expensive for the amount of coverage.
The premiums you pay at the beginning of your mortgage are probably in line with the coverage you are receiving, but as time goes on, you receive much less coverage for the money. You are likely better off going with a term life insurance policy and getting sufficient coverage to pay off your house in full if it is your goal.
Get multiple life insurance quotes before purchasing your life insurance policy.
Should You Buy Mortgage Life Insurance?
While any type of policy is better than nothing, mortgage life insurance doesn’t seem like an excellent idea for most families who need a life insurance policy.
Generally, mortgage life insurance requires you to pay the same monthly amount for a decreasing death benefit. Plus, you have no control over where the policy’s payout goes or how it is used.
For most people, a traditional term life insurance policy is a better option than mortgage protection insurance due to a potentially larger payout, lower premiums, and the flexibility of using your life insurance settlement how and when you want.
That said, there are still a handful of reasons people want mortgage life insurance. The primary advantage of mortgage life insurance is you can generally get a policy with minimal health screenings or underwriting.
Meanwhile, you may not be required to submit to a medical exam before purchasing a mortgage protection policy. If you have trouble purchasing a term life insurance policy, then applying for a mortgage life insurance policy when you buy your house is a good idea.
Whether or not you should buy a policy depends upon the amount of your loan, the value of your house, your family’s assets, and your general health.
In addition to these factors, you must consider the term of your loan and the possibility that, if you rewrite your mortgage or the bank sells your loan, you’ll have to rewrite the mortgage insurance policy.
The most important thing to remember is you need to buy enough life insurance to meet all your financial needs – not just paying off your house.
How Much Does Mortgage Life Insurance Cost?
The cost of a mortgage protection insurance policy depends on a few factors. For example, insurance companies will examine the remaining balance of your mortgage loan and how much time is left in your loan term.
As with a traditional life insurance policy, they’ll also consider your age, job, and overall risk level.
In general, you can expect to pay at least $50 a month for a bare-minimum MPI policy.
Pros & Cons of a Mortgage Life Policy
Pros
- You may be able to obtain mortgage life insurance even if you have a difficult time getting coverage elsewhere. Some policies do not require an exam.
- Your family will have a mortgage-free home if you die or cannot work due to illness or injury.
- You can gain from this policy even if you don’t die.
- You can sleep well at night knowing your family is protected.
Cons
- Mortgage life insurance is a decreasing benefit.
- Mortgage lenders are the biggest beneficiary, not the insured party.
- You have no control over where the life insurance settlement goes.
- Mortgage life insurance is expensive for the coverage amount purchased.
- Term Life insurance is often a better life insurance policy for most families.
Why Most Families Would Gain from a Term Life Insurance Policy Instead:
Having a mortgage-free home if you die or cannot work may sound attractive, but it doesn’t mean mortgage protection insurance is the best way to achieve this.
Most people would be better off purchasing a term life insurance policy big enough to cover their mortgage and provide for other financial needs.
Here are five reasons you should seriously consider term life insurance instead of mortgage life insurance:
1. Term Life insurance is usually cheaper
Most of the time, term life premiums are considerably less than the mortgage protection insurance premiums offered when you take out a home loan. If you want to find out how much you might pay, fill out the form at the bottom of this page for an instant quote.
2. You’ll get a fixed payout
The face value of a traditional term life policy never changes. Your beneficiaries will receive a fixed cash payout regardless of when your family files a claim.
Since mortgage life insurance only pays off your mortgage, your benefit will naturally decline as you pay off your loan.
3. You can get much more coverage with a Term Life policy
Mortgage protection has a limited coverage amount. However, you can get a policy big enough to cover your mortgage, replace your income, and provide for your loved ones.
This is especially valuable for young families with other loans or debts such as student loans, car payments, credit cards, and more. A larger payout and cash benefit can also provide money for a college education fund for your children, allowing them to avoid student loans.
If paying off the family mortgage is a priority, you can buy a term policy big enough to pay off your property and provide a cash benefit to your family.
4. You won’t be penalized for paying off your mortgage faster
With mortgage life insurance, your benefit goes down with each month you pay down your mortgage. In this respect, paying your house off early exacts a penalty that could cost you money.
With traditional life insurance, on the other hand, you’ll get a set death benefit that won’t change if you decide to pay off your home early. Term life also covers you for a fixed period, unlike a mortgage protection plan, which is tied to your mortgage length.
5. Term Life policies pay your beneficiaries with cash
Term life insurance provides your beneficiaries with cash they can use in whatever way seems fit. This means your family will receive cash they can use as they wish.
They can certainly do so if they want to use the funds to pay off your mortgage. But since you may not know how your family’s needs might change in the next five, ten, or twenty years, it’s nice to provide them with cash they can use as they please.
Get a Free Term Life Insurance Quote
Once you take a closer look at the advantages and drawbacks of mortgage life insurance, it becomes pretty apparent a larger, term life policy might be a smarter option for your family.
If you want to protect your family from the unknown, it’s smart to begin shopping for a policy as soon as possible.
Get a Free Life Insurance Quote from Haven Life: Visit the Haven Life website for more information or free life insurance quotes from multiple companies. You can also fill out the form below.
The form will give you an idea of how much you might pay depending on your general health, location, and the coverage you need. The quote is free, and there is no obligation.
Don’t wait to provide your family with the protection they’ll rely on in the event of your death; get instant life insurance quotes today. Your family will thank you for it!
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Erica says
I got a quote from State Farm for Mortgage Protection – $100,000 for $24 a month. That’s a hell of a lot less expensive then term life.
Ryan Guina says
Erica, that really depends on many factors, such as age, health, insurance provider, etc. I know people who have $500,000 term life for less than $50/mo and a $1,000,000 policy for less than $100 per month. So for some people, yes, $100,000 for $24 will be a good deal. But for others it isn’t. Each person should review their options and compare them before they make their decision. Life insurance is highly individualized.
Ruby Phillips says
I have not seen anyone refer to age limit. I have a term and when I reach 65 the amount was cut and my premium went up, and at 75 it ends. I will be paid many years for nothing and my house will not be paid off. the premium have gone up too. The purpose of the term policy was to cover my debt in case of my death, but I am way healthy and will out live this policy. I also carry a whole life which was converted from a term and it will continue until I die, but the premium still go up but it will not be enough to cover the house. So be warned be cause advancing age can change the financial game. The MPI from a company would be less than my term premiums. so I will be looking into this. Thanks for the info…but people need to know the term limits by age too
Kristen says
Is there any reason you can’t have both regular term life insurance and mortgage life insurance?
Sam says
Do mortgage lenders still offer decreasing term? I sell mortgage insurance and am surprised to see an expert harping on this old type. I did not know it still exists.