What is mortgage life insurance?
A mortgage life insurance policy is a term life policy specifically designed to pay off mortgage debt and related costs in the event of the death of the borrower.
These policies are different from traditional life insurance policies. With a traditional policy, the death benefit is paid when the borrower passes away. However, a life insurance policy does not pay a mortgage unless the borrower dies while the mortgage still exists and the beneficiary is the mortgage lender. The term of the life insurance policy coincides with the term of the mortgage, and generally the death benefit is reduced each year to correspond to the new outstanding balance of the mortgage as payments are made on the mortgage. mortgage.
Key takeaways
- A mortgage life insurance policy pays a death benefit to the lender if a home borrower dies during the term of the mortgage loan.
- These term policies are structured to equal the number of years left on a mortgage, with death benefit amounts varying each year to reflect the reduced mortgage balance remaining after each year.
- Borrowers whose lender requires mortgage life insurance can opt for permanent life insurance, in which they will be able to nominate new beneficiaries after fulfilling the mortgage obligation.
—
Understanding Mortgage Life Insurance
There are two basic types of mortgage life insurance: reduced term insurance, where the policy size decreases with the outstanding mortgage balance until both reach zero; and level term insurance, where the size of the policy does not decrease. Term insurance would be suitable for a lender with an interest-only mortgage.
Before purchasing mortgage life insurance, a prospective policyholder should carefully examine and analyze the terms, costs, and benefits of the policy. Remember, there are two life cycles to consider: the life of the insured and the life of the mortgage. It is also important to find out if someone could get the same level of coverage for their family at a lower cost, and with fewer restrictions, by purchasing term life insurance.
Mortgage life insurance should not be confused with private mortgage insurance (PMI), a product that people who take out a mortgage usually claim for less than 80% of the value of their country.
—
Mortgage life insurance benefits
Mortgage life insurance offers near universal coverage with little underwriting. Often, no medical exam or blood sample is required and it can be a valuable insurance policy option for any homeowner with serious pre-existing medical conditions that would prevent them from purchasing traditional life insurance.
Other benefits include:
- With a mortgage life insurance policy, heirs don’t have to worry or think about what will happen to their family home. If an insured dies or becomes seriously ill and is unable to work, the mortgage life insurance policy will cancel the entire mortgage loan.
- With a few exceptions, most traditional life insurance policies will not pay unless you die within your coverage period. In contrast, most mortgage life insurance policies offer coverage that works if you become disabled or unable to work, making this type of insurance a bit more versatile than a traditional term or policy.
- This coverage alleviates the insured’s concern that their family has a place to live if they die or cannot work. After the mortgage is paid, the family will always have a place to live, as long as it can pay taxes and property insurance each year.
–
