Do I Have Mortgage Life Insurance?

If you're unsure whether you have mortgage life insurance, it's important to understand what it is and how it works. Mortgage life insurance, also known as mortgage protection insurance, is a type of insurance policy designed to pay off the remaining balance on your mortgage in the event of your death. This ensures that your loved ones won't have to shoulder the burden of mortgage payments during their time of grief and can remain in their home. While it's not a legal requirement to have mortgage life insurance, it can provide peace of mind and financial security for your family.

Do I need mortgage life insurance?

Mortgage life insurance is a type of insurance that pays out if you die before you finish paying your mortgage. It is designed to prevent those you leave behind from worrying about monthly mortgage repayments or being forced to sell the property to repay the amount still owed.

Mortgage life insurance is not a requirement. However, if anyone relies on your income to pay the mortgage and would struggle to keep up with payments without you, a mortgage life insurance policy can be a cheap way to ensure they have a financial lifeline when you're gone. If you don't have dependants, you may not need life insurance at all.

There are two main types of mortgage life insurance:

• Decreasing term: This is the most common and usually the cheapest type of mortgage life insurance. The payout reduces over time in line with your mortgage balance, while your monthly payments stay the same. This type of insurance is designed for repayment mortgages.
• Level term: These policies tend to be more expensive, as they pay a fixed lump sum if you die within a certain period. This type of insurance may be better if you want to leave a lump sum for your dependents to cover more than just your mortgage, such as other debts or ongoing expenses. Level-term insurance is also a good option if you have an interest-only mortgage.

When deciding whether to get mortgage life insurance, it's important to consider your loved ones' financial needs. If they rely heavily on your income, mortgage life insurance can help avoid burdening them with a large, long-term debt. Additionally, consider your mortgage balance and term. If you're close to paying off your mortgage, you may not need this type of insurance.

Another factor to consider is the cost of insurance relative to your budget, life expectancy, and your loved ones' ability to pay off the mortgage. Mortgage life insurance can be expensive, and the cost per dollar of coverage increases over time as the death benefit decreases.

Before purchasing mortgage life insurance, weigh your options and consider alternative forms of insurance, such as term life insurance or whole life insurance, which offer more flexibility and control over how the payout is used.

What does mortgage life insurance cover?

Mortgage life insurance is a type of insurance policy that pays off the remaining balance on your mortgage when you die. It is designed to ensure your family does not inherit your mortgage debt and lose their home.

The policy's death benefit is paid directly to the lender, meaning your loved ones won't receive any money. The benefit is usually reduced each year to correspond with the new amortized mortgage balance outstanding as payments are made. This means that while your premiums stay the same, the payout decreases over time.

Mortgage life insurance is often sold by mortgage lenders and can be rolled into your loan. It is not a legal requirement, and there are other types of insurance that offer more flexibility, such as term life insurance.

What are the pros and cons of mortgage life insurance?

Pros of Mortgage Life Insurance

• No medical exam: Mortgage life insurance policies generally don’t require a medical exam and, in some cases, may not even ask health questions. This can make this policy more accessible to homeowners who don’t like to take medical exams for life insurance or want to get coverage more quickly.
• Level premiums: Mortgage life insurance premiums are level, meaning they don’t change throughout the policy term once you get the policy. The predictability of level premiums can allow you to easily budget for your coverage.
• You can add riders: Riders are add-on coverages with which you can customize your mortgage life insurance policy. For example, a waiver of premium rider can help cover your premiums if you become disabled and unable to work during the policy term.
• Peace of mind for your family: An MPI policy means your mortgage payments are covered if you pass away or become disabled. This ensures that your family won’t be responsible for paying off your mortgage or losing the house due to a foreclosure.
• Guaranteed policy acceptance: Guaranteed acceptance means you can’t be denied an MPI policy based on your health condition. This can benefit homeowners who are having a difficult time getting a life insurance policy or would typically have to pay higher rates for life insurance.
• Underwriting not required: MPI plans often don’t require underwriting because most policies don’t need you to submit a medical exam to qualify for mortgage life insurance coverage.

Cons of Mortgage Life Insurance

• Lack of flexibility: The money from a mortgage life insurance policy goes directly to the lender, so your family won’t have the freedom to spend the money as they like.
• Decreasing payout: While premiums stay the same, the payout decreases as you pay down your mortgage.
• Higher premiums: Premiums for MPI are often much higher than term life insurance.
• Extra monthly payment: With an MPI plan, you’ll be responsible for making an extra payment every month.
• Limited payout options: If you pass away, the MPI payout only goes toward your mortgage debt. Mortgage life insurance won’t provide your family with money to cover taxes, bills or funeral costs.
• Alternative policies may work better: If you want an insurance policy that provides more of a financial safety net for your family members, you might consider a traditional life insurance policy over MPI.

How does mortgage life insurance compare to other policies?

Mortgage life insurance, also known as mortgage protection insurance, is a type of life insurance policy that pays off your mortgage debt if you die. While this can prevent your family from losing their home, it may not be the best option for everyone. The key difference between mortgage life insurance and other policies is that mortgage life insurance designates your mortgage lender as the policy's beneficiary, meaning your loved ones do not receive a death benefit. Instead, the lender uses the insurance payout to settle the remaining mortgage.

Mortgage life insurance is usually sold by the mortgage lender, an affiliated insurance company, or another insurance company that contacts you after finding your information through public records. The policy's length coincides with the number of years you have to pay off your mortgage. If you buy it from your mortgage lender, the premiums can be included in your loan.

With mortgage life insurance, the benefit decreases as you pay down your mortgage, but the premiums remain level throughout the term. This means you are paying the same premium for a decreasing benefit. Once your mortgage is paid off, the coverage ends, and there is no payout for your beneficiaries.

In contrast, a standard term life insurance policy offers more flexibility. It allows you to choose a coverage amount and policy length that aligns with your mortgage or other financial responsibilities. Your beneficiaries can use the payout for various purposes, such as credit card debt, children's college costs, or replacing lost income.

Term life insurance premiums are typically low for the first term, and the death benefit is tax-free. Additionally, the coverage amount does not decrease over time, even if you repay your mortgage. The policy remains with you even if you transfer your mortgage to another company, and there is no need to reapply or prove your health status.

Another option is whole life insurance, which provides lifelong coverage. Over time, the policy can build value that you can access during your life. However, any money withdrawn from the policy's cash value is taxable.

When deciding between mortgage life insurance and other policies, consider your specific needs and circumstances. If you already have sufficient life insurance coverage, mortgage protection insurance may not be necessary. However, if you face challenges in obtaining life insurance due to age, health, or occupation, mortgage protection insurance can be a viable alternative.

Is mortgage life insurance worth it?

Mortgage life insurance is a type of insurance policy that pays off the remainder of your mortgage when you die. While it can give you and your family peace of mind that the mortgage will be paid off, it is not always the best option. Here are some things to consider when deciding if mortgage life insurance is worth it:

Pros of Mortgage Life Insurance:

• No medical exam: Mortgage life insurance generally does not require a medical exam, and in some cases, there are no health questions. This makes it more accessible for those with medical conditions or who don't want to take a medical exam.
• Easy to manage: Mortgage life insurance is designed to be easy to manage, with the death benefit going straight to the lender. Your beneficiaries don't have to manage the funds.
• Riders: You can add riders to your policy, such as a waiver of premium rider that covers your premiums if you become disabled and unable to work.

Cons of Mortgage Life Insurance:

• Lack of flexibility: The biggest drawback of mortgage life insurance is that the death benefit goes directly to the mortgage lender, and your loved ones won't receive any money. They won't have the freedom to spend the money as they wish and won't be able to use it for other expenses or needs.
• Declining payout: The payout of mortgage life insurance decreases as you pay down your mortgage, but your premiums stay the same. This means you are paying the same premium for a decreasing level of coverage.
• Higher premiums: Mortgage life insurance often has higher premiums than term life insurance and can be expensive, especially for individuals in good health.
• Lack of transparency: It can be challenging to get quotes for mortgage life insurance online, making it difficult to compare policies and find the best price.

Alternatives to Mortgage Life Insurance:

Term life insurance is often a better alternative to mortgage life insurance as it offers more flexibility and control. With term life insurance, you can choose the coverage amount and policy length, and the payout can be used for any purpose, including paying off the mortgage. Whole life insurance is another option that lasts for the insured's lifetime and has additional benefits such as building wealth through a cash value growth component.

Frequently asked questions