Life Insurance: What Next After Paying Off Your Mortgage?

Life insurance is often taken out to cover an outstanding mortgage balance, but what happens to it when that mortgage is paid off? This is a significant financial milestone, but it's important to know what to do with your life insurance policy. The first thing to check is whether your life insurance plan accumulated any cash value, savings, or investments as you paid into it. If so, you may want to keep the policy and withdraw or borrow the cash amount as supplemental retirement income. You can also use the cash value as a premium offset to reduce future premium costs or convert the policy type or death benefit amount to fit your new needs while maintaining the cash value. If your policy has no cash value, you can cancel it, but you should first check for any early termination fees and make sure your beneficiaries know the policy will be terminated.

The pros and cons of mortgage life insurance

Mortgage life insurance is a type of insurance policy that pays off your mortgage when you die. While this can be a good option for some, it's not always the best choice. Here are some pros and cons to help you decide if mortgage life insurance is right for you.

Pros:

• Guaranteed policy acceptance: You can't be denied an MPI policy based on your health condition, which is beneficial for those with pre-existing conditions or poor health.
• No underwriting required: MPI plans often don't require underwriting or a medical exam, making it easier to qualify for coverage.
• Peace of mind for your family: Your family won't be responsible for paying off your mortgage or losing their home due to foreclosure if you have an MPI policy.

Cons:

• Extra monthly payment: MPI requires an additional payment each month, so you'll need to ensure it fits your budget.
• Limited payout options: The MPI payout only goes towards your mortgage debt and cannot be used for other expenses like taxes, bills, or funeral costs.
• Alternative policies may be better: A traditional life insurance policy may be a better option if you want to provide a more comprehensive financial safety net for your family.
• High premiums: Mortgage life insurance policies often have high premiums, especially for healthy individuals, and may be more expensive than regular life insurance.
• Lack of transparency: It can be challenging to obtain quotes for mortgage life insurance, making it difficult to compare prices and find the best deal.
• Fluctuating premiums: Premiums on mortgage life insurance policies may only be fixed for the first few years and could increase at any time thereafter.
• Benefits the lender more than the insured: The mortgage lender is the beneficiary of the policy, and your family won't receive any money. This lack of control over the settlement may be undesirable.

Mortgage life insurance vs. traditional life insurance

Overview

Mortgage life insurance and traditional life insurance are both designed to provide financial protection for your loved ones in the event of your death. However, there are several key differences between the two types of policies in terms of structure, costs, benefits, and limitations.

Type of Coverage

Mortgage life insurance, also known as mortgage protection insurance, is designed with a specific goal in mind: to pay off the remaining balance on your mortgage in the event of your death. The coverage amount decreases over time as you pay down the loan, and the benefit is typically paid directly to the lender.

On the other hand, traditional life insurance offers a broader range of coverage. It can be used to protect a variety of financial obligations, such as large debts, healthcare costs, childcare expenses, and final expenses. The benefit is usually paid directly to the policyholder's beneficiaries, who can use the money as they see fit.

Costs

The cost of mortgage life insurance is primarily based on the remaining balance of the mortgage loan, the time left on the loan, and the policyholder's age. The premium tends to remain level throughout the policy, even as the coverage amount decreases. This means that towards the end of the policy, you will be paying the same premium for substantially less coverage.

Term life insurance, a type of traditional life insurance, takes into account many more factors when determining the cost, including age, gender, health status, smoking status, occupation, and family history. Term life insurance typically requires a more rigorous underwriting process and may include a medical exam. While the initial premium may be higher than that of mortgage life insurance, especially for those in good health, it often provides more coverage for the price.

Benefits and Limitations

One advantage of mortgage life insurance is that it is generally easier to get approved, even for individuals with health issues or other factors that may create problems when applying for traditional life insurance. The minimal underwriting process means there is a lower risk of being turned down or penalized with higher premiums.

Traditional life insurance, on the other hand, offers much more flexibility. Beneficiaries receive the full benefit amount directly and can use it for any purpose, including paying off the mortgage, final expenses, or other financial needs. With mortgage life insurance, the benefit goes directly to the lender, and no money is paid directly to the policyholder's family.

Considerations

If you are in good health and have a good medical history, term life insurance is often the most cost-effective and flexible option for covering significant assets, such as a home, and other financial obligations.

Mortgage life insurance may be a better choice for individuals who cannot afford term life insurance or have health issues that make the cost of term life insurance unrealistic. It is important to consider your own circumstances and financial needs when deciding between mortgage life insurance and traditional life insurance.

What happens to mortgage life insurance if you move?

If you move, your mortgage life insurance policy might not move with you. If you sell your house and pay off the existing mortgage, the life insurance policy could terminate. Check the policy for details on what happens if you move.

Mortgage life insurance is a special type of insurance policy offered by banks that are affiliated with lenders and by independent insurance companies. It is designed to pay off a mortgage when the borrower dies as long as the loan still exists. This is a significant benefit to your heirs if you die and leave behind a balance on your mortgage. However, if there is no mortgage, there is no payoff.

Mortgage life insurance policies come in two basic forms:

• Declining payout policy: The policy size decreases proportionally as the mortgage loan drops.
• Level term insurance: The payout remains the same throughout the policy term.

The benefits of mortgage life insurance include:

• No medical exam: Mortgage life insurance policies generally don't require a medical exam and, in some cases, may not even ask health questions.
• Level premiums: Mortgage life insurance premiums are level, meaning they don't change throughout the policy term once you get the policy.
• Riders: Riders are add-on coverages that allow you to customize your mortgage life insurance policy.

However, there are also some drawbacks to mortgage life insurance:

• Lack of flexibility: The death benefit goes directly to the mortgage lender, and beneficiaries cannot use it for any other expenses.
• Decreasing payout: The death benefit decreases as you pay down your mortgage, while the premiums remain the same.
• Cost: Mortgage life insurance can be expensive for the level of coverage you receive.

Mortgage life insurance vs. private mortgage insurance

Mortgage life insurance and private mortgage insurance are two very different financial products. Here's a detailed comparison between the two:

Mortgage Life Insurance (MLI)

Mortgage life insurance is a type of insurance policy offered by banks affiliated with lenders and independent insurance companies. MLI is specifically designed to pay off the remaining mortgage balance when the borrower dies, as long as the loan still exists. This means that if there is no outstanding mortgage balance, there is no payout. The beneficiaries of mortgage life insurance are usually the heirs of the borrower.

MLI policies typically come in two forms: declining payout policies and level term insurance. Declining payout policies decrease proportionally as the mortgage loan balance drops. On the other hand, level term insurance provides a fixed payout that doesn't decrease over time.

MLI policies are often characterised by high premiums and a lack of transparency. The premiums may fluctuate and are usually fixed only for the first five years. Additionally, most insurers send benefit payments directly to lenders, rather than to the beneficiaries.

Private Mortgage Insurance (PMI)

Private mortgage insurance, on the other hand, is designed to protect the lender in the event of the borrower's default, death, or disability. It is typically required by lenders when homebuyers purchase a home with less than a 20% down payment. If the homebuyer defaults on the mortgage, the property is foreclosed and sold at auction, and the mortgage insurance company reimburses the lender for the loss.

Unlike MLI, PMI does not provide any coverage for the borrower's heirs or beneficiaries. It is important to note that PMI is temporary and can be cancelled once the mortgage balance reaches 80% of the home's value. The cost of PMI is usually around half of 1% of the loan amount.

Key Differences

The main difference between MLI and PMI is that MLI provides coverage only in the event of the borrower's death, while PMI protects the lender in case of default, death, or disability. Additionally, MLI offers declining or level payout options, while PMI does not provide any payout to the borrower or their beneficiaries.

Another distinction is that MLI policies tend to have higher premiums and less transparency in pricing compared to PMI. MLI premiums may also fluctuate over time, whereas PMI premiums remain fixed until the coverage is cancelled.

In summary, while both MLI and PMI offer protection in relation to mortgages, they serve different purposes and offer distinct benefits. Homebuyers should carefully consider their needs and seek advice from financial professionals before deciding on the most suitable option.

Who needs mortgage life insurance?

Mortgage life insurance is a special type of insurance policy offered by banks affiliated with lenders and independent insurance companies. It is designed to pay off the remaining mortgage debt when the borrower dies, as long as the loan still exists. This type of insurance is typically beneficial for those who want to ensure their family can stay in the family home, even if they are no longer around.

Mortgage life insurance is usually taken out when someone buys a home or shortly after. The length of the policy will match the number of years left on the mortgage. It is often sold by the mortgage lender or an affiliated insurance company, and the premiums can be rolled into the loan.

This type of insurance may be a good option for those who:

• Are the sole or primary breadwinners in their family, and their loved ones rely heavily on their income.
• Have a large mortgage balance and/or a long time left on their mortgage term.
• Are in poor health or have a poor medical history and may not qualify for other types of insurance.
• Want a quick and easy way to get insurance without undergoing a medical exam.
• Want the peace of mind that their family will not be burdened with mortgage debt if they pass away.

However, it is important to note that mortgage life insurance has some drawbacks. The beneficiaries of the policy cannot use the death benefit for any other expenses, and the payout decreases over time as the mortgage is paid off. Additionally, mortgage life insurance can be expensive, with high premiums that may increase over time.

Before purchasing mortgage life insurance, it is essential to consider your loved ones' financial needs, your budget, and the interest rates on your mortgage. It may be worth exploring other options, such as term life insurance or whole life insurance, which offer more flexibility in how the death benefit is used.

Frequently asked questions