What is Mortgage Protection Life Insurance?
Mortgage life insurance, also known as mortgage protection insurance, is a type of life insurance policy that pays your remaining mortgage debt if you die. It’s often sold by banks or mortgage lenders. The life insurance payout typically goes to the mortgage lender, not your family.
How Mortgage Protection Insurance Works
People usually purchase mortgage protection life insurance from banks or mortgage lenders when they buy a home, or shortly after.
If you die before your home is paid off, mortgage life insurance pays the remaining balance. It’s meant to spare your family from potentially losing the home.
This type of life insurance coincides with the number of years remaining on your mortgage.
- The payout is usually tied to the balance of your mortgage.
- These policies are usually bought from mortgage lenders or banks.
- They tend to cost more than traditional term life insurance.
- Life insurance money is paid directly to the mortgage lender if you die.
- No medical exam is required to obtain coverage.
Sometimes your policy premiums can be rolled into your monthly mortgage payment.
Depending on the policy, mortgage insurance may pay off the entire mortgage or only part of it. Policies with larger payouts are more expensive.
Terms and conditions can vary, but typically, the mortgage lender is the beneficiary of the policy, not your family. The death benefit bypasses your loved ones and goes straight to the mortgage lender to pay the balance.
Unlike term life insurance, the value of most mortgage protection policies decreases over time. As your mortgage gets smaller, so does the insurance protection death benefit.
However, you will likely still pay the same amount for coverage.
A key selling point of mortgage life insurance is peace of mind. Even if you die, the mortgage will be paid off.
These policies offer a few other attractive features, too.
- No Medical Exam
- You typically don’t need to undergo a medical exam to obtain mortgage protection insurance. You may not need to answer health questions, either. If you’re denied life insurance for medical reasons, mortgage life insurance allows you to protect your home.
- Disability Protection
- Some mortgage protection insurance policies will make mortgage payments on your behalf — usually for a limited time — if you become disabled or lose your job.
- Money Can Be Spent on the Mortgage Only
- If your family receives a lump sum of life insurance money after you die, there’s no guarantee that the cash will be spent responsibly. Money from mortgage protection insurance can be used for only one purpose, so you can rest assured that your family won’t run through the funds before the mortgage is paid off.
Mortgage protection life insurance may sound like a smart move, but these policies have a few key drawbacks.
You should understand all the terms of mortgage life insurance before purchasing a policy.
- Since mortgage life insurance policies do not require a medical exam, they almost always cost more than a term life insurance policy with comparable coverage.
- Decreasing Payout
- The payout of mortgage protection insurance usually matches your current mortgage balance. Even though your premiums are usually fixed, the payout shrinks over time. You’ll essentially pay the same amount for less coverage. And your family doesn’t receive any money.
- Lack of Flexibility
- Mortgage life insurance has only one purpose: to pay off your mortgage. Your family’s needs may change over time, but these policies can’t be used to pay other bills or debt.
- Lack of Transparency
- It’s difficult to shop for mortgage protection insurance on your own because you can’t always obtain quotes online and prices can vary widely.
Is Mortgage Protection Insurance Worth It?
For people in good health, term life insurance usually provides a better value than mortgage protection insurance.
Term life insurance is similar to mortgage insurance because you pay for a policy that lasts a certain amount of time. However, it doesn’t include the same restrictions and limitations.
And with term life insurance, your family — not the mortgage lender — receives the payout if you die.
A term life insurance payout gives your beneficiaries the freedom to use the money for any purpose — the mortgage, credit card debt, college tuition, retirement or daily expenses.
In other words, term life offers most of the benefits of mortgage insurance but offers more flexibility and greater control at a lower cost.
However, if your health prevents you from obtaining term life insurance or if the medical underwriting process makes a term life policy too expensive, you may want to consider a mortgage protection life insurance policy.
7 Cited Research Articles
- Golden, N. (2020, May 28). Everything to Know About No-Exam Life Insurance. Retrieved from https://money.com/no-exam-life-insurance/
- Chorpenning, A. (2020, May 20). The Keys To Mortgage Life Insurance. Retrieved from https://www.forbes.com/advisor/life-insurance/mortgage-life-insurance/
- USA.gov. (2020, March 6). Personal Insurance. Retrieved from https://www.usa.gov/personal-insurance
- Huddleston, C. (2020, April 17). How No-Exam Life Insurance Works. Retrieved from https://www.forbes.com/advisor/life-insurance/no-exam/
- Consumer Protection Financial Bureau. (2017, July 28). What is private mortgage insurance? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/
- Consumer Protection Financial Bureau. (n.d.). Mortgages. Retrieved from https://www.consumerfinance.gov/consumer-tools/mortgages/
- LifeHappens.org. (n.d.). What happens if I’m denied life insurance? Retrieved from https://lifehappens.org/life-insurance-101/what-happens-if-im-denied-life-insurance/