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Life insurance for mortgage protection
Is mortgage protection insurance necessary? Are there other alternatives that are better for you? Find out the truth.
When you buy a home, your mailbox will be flooded with offers to buy Mortgage Protection Insurance (MPI). The offers make it sound very attractive and convenient. You may want to ask yourself: is mortgage life insurance a wise decision, or are there better alternatives? That is what we will be discussing in more detail below.
What is mortgage life insurance?
Mortgage life insurance is a specific type of life insurance policy that pays off your home mortgage if you die. Mortgage life insurance is also commonly known as mortgage protection insurance and mortgage cancellation insurance.
The benefit of this type of insurance is that if you die, your family will not lose the home since your mortgage lender is protected. The mortgage debt will be paid off if you die.
How does mortgage life insurance work?
Mortgage life insurance is a term life policy where the mortgage company is named as the beneficiary. Mortgage lenders like these policies because they know they will for sure get paid in the event of the mortgagee’s death. This is because the mortgage lender is named as the sole beneficiary on the policy.
What does mortgage life insurance cover?
A mortgage life insurance policy only covers the mortgage balance owed to the mortgage company. Upon the mortgagee’s death, the mortgage lender calculates a payoff amount which will include the outstanding principal amount plus any mortgage payments in arrears.
The life insurance company then issues a check to the mortgage lender to eliminate the debt entirely.
Drawbacks of mortgage life insurance
The disadvantages of mortgage life insurance are significant, and they should be considered before you buy it.
First, the typical mortgage life insurance policy names the mortgage lender as the only beneficiary on the policy. The heirs or family get no money from the death benefit, so the coverage is very limited.
Second, mortgage life insurance is more expensive compared to other life insurance policies for what it covers. This is because the premiums are often based on the borrower’s age, health, and loan amount. Additionally, most mortgage life insurance policies have level premiums, meaning the rates will not decrease over time like they would with other types of policies.
Unfortunately, mortgage life insurance policies are offered so that the homeowner doesn’t even think of exploring alternatives most of the time. They assume this is a stand-alone product, and they probably should have it to protect the family if the borrower dies. So they fill out the card that came in the mail and just buy the policy without investigating other possibilities.
How is mortgage life insurance different from term life insurance?
First, it’s important to understand that mortgage life insurance is not the same as traditional life insurance. Term life insurance policies are designed to provide financial protection for a specific period of time, while whole life insurance policies offer lifelong coverage. Mortgage life insurance, on the other hand, only pays out if you die while you still have a mortgage balance. That means that if you pay off your mortgage before you pass away, your beneficiaries won’t receive a death benefit. Mortgage life insurance is just one type of term life insurance, albeit a very limited type. Although you may be offered a few options, typically you are quite limited in what you can purchase.
One specific area of limitation is the death benefit amount. Since you are only insuring the mortgage and only naming the mortgage lender as the beneficiary, there is no reason to increase coverage.
Another area you are usually limited in is the naming of the beneficiary on the policy. For example, mortgage life insurance policies usually only name the mortgage company as the sole beneficiary.
So what to do?
Term life insurance for mortgage protection
A term life insurance policy is perfect for those who want coverage for a specific period of time, such as the length of their mortgage. Buying a term life insurance policy is one great way to get life insurance coverage to protect your family by paying off the mortgage if you die. In addition, you can buy a large enough policy to also leave them a nest egg on top of paying off the mortgage.
Alternatively, your family can use the proceeds to pay the mortgage payments until they decide whether to pay off the mortgage or perhaps sell the house. This gives them options that they would not have with a mortgage-only life insurance policy.
Most people choose term life insurance for mortgage protection because it’s more affordable and gives you the flexibility to cancel or convert to whole life insurance later on if your needs change.
Frequently asked questions
Q1. Does term life insurance pay off a mortgage?
Yes, paying off a mortgage is the beneficiary’s choice with term life insurance in the broader sense. However, although mortgage life insurance is also term life insurance, this is a very limited type of term policy.
When you purchase a term policy, the death benefit can be used for whatever purpose the beneficiaries desire.
Q2. Is mortgage life insurance a good idea?
A mortgage life insurance can be one way to protect your dependents from losing their home. In that sense, it is a good idea. However, you can buy life insurance policies that could pay off the mortgage and offer more flexibility at a lower cost.
Q3. Do I need homeowner’s insurance if I have a mortgage?
Yes, mortgage companies generally require that you have homeowner’s insurance. However, mortgage protection insurance is not to be confused with homeowners insurance or private mortgage insurance; these insurance policies are for very different purposes.
Homeowner’s insurance, also known as hazard insurance, covers the actual property insured against natural hazards. If your property incurs damage, the homeowner’s insurance company will do repairs or even rebuild the house if the damage is covered by the policy. However, it does not pay the mortgage.
Private mortgage insurance will cover the lender in case of the borrower default. For example, suppose the borrower can’t or refuses to make the payments. In that case, the lender will be covered for a certain portion of the mortgage balance, usually up to 20%. This is not life insurance in any form.
Q4. What type of mortgage protection insurance do you need?
You need to be able to protect your dependents in case you die and have a mortgage on your home. You can do so with a term life policy or a permanent, whole-life insurance policy.
As long as there is enough death benefit to pay off the mortgage, it doesn’t matter much what type of insurance it is. However, there are better and less ideal products to achieve the same goal.
Q5. Which is better and why: term or mortgage life insurance?
A term life insurance policy with enough death benefit to pay off your mortgage and take care of your dependents’ needs is the best way to go.
Buying a mortgage protection insurance policy limit what your heirs can do unnecessarily. You can get a term or permanent policy with equal death benefit at a lower price.
Protecting your family in the event of your premature death is an important part of planning for the future. Making sure they will not face hardship due to debts, including their mortgage, will give everyone great peace of mind.
Making well-informed decisions about the type of insurance coverage that will give you the best benefits is a sensible step to selecting the best coverage for your needs. Speaking with a licensed life insurance agent who knows the different policies, features, and benefits is always advisable.
Our team of professional, dedicated insurance agents is just a phone call away. So get in touch with us today.