Do I Have Mortgage Life Insurance?

If you're a homeowner, you may want to consider mortgage life insurance, also known as mortgage protection insurance. This type of insurance is designed to pay off the remainder of your mortgage if you die during the term. It's important to note that mortgage life insurance is different from mortgage insurance, which is required when you make a smaller down payment on a property. While mortgage life insurance provides peace of mind that your loved ones won't be burdened with your mortgage in the event of your death, it's not the only option available. Term life insurance, for example, can also cover your mortgage and provide additional benefits. Ultimately, the best policy for you will depend on your budget, financial situation, and specific needs.

Mortgage life insurance vs. mortgage insurance

Mortgage life insurance and mortgage insurance are two very different things. Mortgage life insurance is a type of life insurance policy that pays off the remainder of your mortgage if you die during the term. It is a term life insurance product, meaning it will end after a specified timeframe—in this case, after your mortgage term ends. The beneficiary of a mortgage life insurance policy is usually the mortgage lender, but some policies allow you to select a beneficiary other than the mortgage company.

On the other hand, mortgage insurance is required with smaller down payments. If you have a mortgage and your down payment is less than the average 20%, your lender will require mortgage insurance to protect them in case you default on your mortgage payments. This is known as private mortgage insurance or PMI.

Mortgage life insurance is often marketed to homeowners as a way to pay off their mortgage in case of death, but it is important to understand the differences between the two types of insurance before making a decision. Mortgage life insurance may be more expensive than traditional life insurance and may not offer the same level of flexibility. Additionally, the payout from mortgage life insurance decreases as you pay down your mortgage, while the premiums stay the same.

Traditional life insurance, on the other hand, can be used to cover a variety of financial obligations, including your mortgage. It also offers more flexibility in terms of the payout, as your beneficiaries can choose how to use the money. However, traditional life insurance may require a medical exam and may be more difficult to qualify for if you have health issues.

Ultimately, the decision between mortgage life insurance and traditional life insurance depends on your individual needs and circumstances. If you are concerned about your ability to qualify for traditional life insurance, mortgage life insurance may be a good option. However, if you are looking for more flexibility and control, traditional life insurance may be a better choice.

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, making them more accessible to homeowners who don't want to take medical exams for life insurance or want 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. This predictability can make budgeting easier.
• Riders: Riders are add-on coverages that allow customization of the policy. For example, a waiver of premium rider can help cover premiums if the policyholder becomes disabled and unable to work.
• Peace of mind: This insurance provides peace of mind that your family will be protected if you pass away with an outstanding mortgage balance.

Cons of Mortgage Life Insurance

• Limited use of death benefit: The death benefit is paid directly to the mortgage lender, so beneficiaries can't use it for other expenses.
• Decreasing payout: The death benefit decreases as the mortgage is paid down, but premiums remain the same, resulting in a higher cost per dollar of coverage over time.
• Can be expensive: Mortgage life insurance can be costly for the level of coverage, especially compared to term life insurance, due to the lack of a medical exam.
• Lacks wealth-building component: Unlike permanent life insurance, mortgage life insurance doesn't have a cash value growth component, so it can't be used as a wealth-building vehicle while the policy is active.

Who the beneficiary is

The beneficiary of a mortgage life insurance policy is usually the mortgage lender. This means that, in the event of the policyholder's death, the insurance payout goes directly to the lender to cover the cost of the mortgage. This ensures that the debt is paid off and that the policyholder's loved ones are not burdened with it.

However, some mortgage life insurance policies allow the policyholder to select a beneficiary other than the mortgage company. For example, a person can name their spouse as the beneficiary. In this case, the spouse will receive the insurance payout and can choose whether to pay off the mortgage or sell the house.

If a person has a term life insurance policy in addition to mortgage life insurance, and their spouse is the beneficiary of both, then the spouse will receive two payouts. However, the death benefit for the mortgage life insurance policy is equal to the amount remaining on the mortgage loan.

It is worth noting that mortgage life insurance is distinct from private mortgage insurance (also known as PMI or MIP), which is required by lenders when the down payment on a property is less than the typical 20%.

Cost of mortgage life insurance

The cost of mortgage life insurance varies depending on factors such as age, health, lifestyle choices, and the cost of your home loan. The monthly premium for a mortgage protection insurance policy can range from as little as $5 per month to $100 per month, with some sources giving a range of $20 to $100 per month. Generally, people pay somewhere between $30 and $150 a month. The younger you are, the more affordable mortgage protection insurance will be.

Mortgage life insurance is typically more expensive than traditional life insurance. This is because there is no medical exam to determine your insurance risk, and the death benefit decreases over time as you pay off your mortgage, even though the premium typically remains the same.

When selecting your death benefit amount for term life insurance, the rule of thumb is to select 10 times your annual income to cover the mortgage, education for dependents, and other costs if you die. For example, if you make $75,000 per year, you would purchase a life insurance policy for $750,000.

How to choose the right policy

The best mortgage life insurance policy for you depends on your budget, financial situation, and health. It is always a good idea to consult an accountant and financial advisor to determine which policy fits your financial needs and goals. Here are some factors to consider when choosing a mortgage life insurance policy:

• Your budget: Mortgage life insurance has a high cost per dollar of coverage. Weigh your budget against your life expectancy and your loved one's ability to pay off the mortgage.
• Your loved one's financial needs: If your loved ones rely solely or heavily on your income, a mortgage life insurance policy can be helpful. It helps you avoid burdening them with a large, long-term debt while allowing them to gain full ownership of a valuable asset if you pass away.
• Your mortgage balance and term: If you are close to paying off your mortgage, you may not need a mortgage life insurance policy. On the other hand, a large balance or long remaining term may necessitate getting a policy.
• Interest rates: If your mortgage has a low-interest rate and your loved ones can afford to live without your income, you may consider a traditional life insurance policy.
• Tax benefits: If you don't get a mortgage protection policy, your loved ones may be able to take advantage of mortgage-related tax advantages, such as the mortgage interest deduction.
• Your health: Mortgage life insurance doesn't require a medical exam, so it may be a good option for those with pre-existing health conditions. However, traditional life insurance may be cheaper for those in good health.
• Your age: Mortgage life insurance may be a better option for seniors compared to other age groups, as they may face more health issues and have fewer financial obligations.
• Your other financial obligations: If you have minimal or no other financial obligations, mortgage life insurance may be a good fit. Traditional life insurance can be used to cover multiple obligations, such as a mortgage, car payments, children's tuition, and college expenses.

It is important to carefully consider your needs and compare available options before choosing a mortgage life insurance policy. You can obtain mortgage life insurance through your mortgage lender, a private insurance company, or a life insurance broker. Consulting a financial advisor or insurance professional can help you assess your financial situation and insurance needs to recommend the most suitable product.

Frequently asked questions