Mortgage Life Insurance: What It Is and How It Works

Mortgage life insurance is a type of term life insurance product that pays off the mortgage balance if the insured dies before paying their mortgage in full. Also known as mortgage protection insurance (MPI), this policy typically operates as a decreasing term policy. As the loan balance decreases, so does the death benefit amount.

Although mortgage life insurance may be a good idea in certain situations, normal term life insurance can be just as valuable and may be a better solution for some individuals. Term life insurance lets you choose your own beneficiary, while your beneficiary in a mortgage life policy is the lender.

• What Is Mortgage Life Insurance?
• How Mortgage Life Insurance Works
• How Much It Costs
• Pros and Cons of MPI
• Should You Buy MPI?
• Frequently Asked Questions

Mortgage life insurance is life insurance that pays off the mortgage if you die while there’s still a loan balance.

Banks and lenders frequently offer mortgage protection life insurance as a decreasing term policy. The face amount of the term life policy matches the mortgage balance and decreases as you pay down the mortgage. The lender is the beneficiary, so if you die before you completely pay off the mortgage, your dependents don’t have to worry about paying it off or having to sell the house to satisfy the loan.

Mortgage life insurance works by providing a death benefit equal to your mortgage balance to the lender if you die before it’s paid off. Life insurance for mortgage protection removes the financial burden of paying the loan off from your dependents, allowing the house to stay with the family after you’re gone.

Mortgage protection life insurance is a specific type of term life insurance. Although it’s similar in some regard, it differs from how other types of life insurance work, including term life insurance.

RELATED: HOW DOES LIFE INSURANCE WORK?

Although most mortgage life insurance policies only pay off a mortgage balance upon the insured's death, some plans offer additional benefits in the form of temporary coverage for mortgage payments.

Here's what mortgage life insurance typically covers:

• Mortgage Payoff: If the insured dies, the policy pays off the remaining mortgage balance, allowing the family to own the home free and clear. It's aligned with the mortgage balance, so the value decreases as the mortgage is paid down.

• Disability and Job Loss Benefits: Some policies may temporarily cover mortgage payments if the insured loses their job or becomes disabled. This additional benefit provides a safety net during challenging times.

Mortgage life insurance has specific limitations that may affect your decision to purchase a policy. Here's what mortgage life insurance typically doesn’t cover:

• Other Costs of Homeownership: Mortgage life insurance only covers the mortgage balance or payments. It doesn’t extend to other homeownership costs such as property taxes, homeowner's insurance or homeowners association (HOA) fees. These expenses will remain the responsibility of the homeowner or their estate.

• Funeral Costs: Unlike some life insurance policies that may include coverage for funeral expenses, mortgage life insurance doesn’t provide any benefits for funeral arrangements. Families must plan for these costs separately.

• Non-Mortgage Debt: Mortgage life insurance specifically covers mortgage balance or payments. It doesn’t extend to other debts, such as credit card balances, car loans or personal loans. This insurance doesn’t affect other financial obligations.

• Living Expenses for Beneficiaries: Standard life insurance policies may help cover ongoing living expenses for beneficiaries, but mortgage life insurance typically doesn’t. It's solely focused on the mortgage, leaving other financial support needs unaddressed.

• Health-Related Limitations: Some policies may have specific limitations related to health conditions or causes of death. For example, a policy might cover accidental death but not death from natural causes. Understanding these nuances is vital to ensure the policy meets your needs.

• Limited Unemployment and Disability Benefits: While some policies offer temporary mortgage payments in case of job loss or disability, these benefits may be limited in duration or amount. Understanding the specific terms and limitations is essential to avoid surprises.

The cost of mortgage life insurance can be higher than term life insurance if you’re in good health since health is not as much of a factor. If you're in poor health, you might save with mortgage protection life insurance compared to a regular term life insurance policy. The lack of a medical exam can make it easier for individuals with health issues to qualify for coverage, potentially at a lower cost than a traditional policy that considers health.

For instance, the average cost of a 20-year term life insurance policy with a $250,000 coverage limit can be anywhere from $20 to $752 monthly, or approximately $240 to $9,024 per year. Actual rates will depend on your age, gender, health, lifestyle and other criteria.

The cost of mortgage life insurance can vary widely based on several factors. Insurers use these factors to assess the risk associated with the policy and determine the appropriate premiums.

The major benefit of mortgage life insurance is being able to pay off the mortgage if the primary breadwinner dies. It removes the insured’s loved ones’ financial burden of having to continue making mortgage payments or risk losing the family home. But, as with any type of life insurance, there are pros and cons to taking out a mortgage life insurance policy.

Mortgage protection life insurance can allow the heirs to stay in the family home, free from mortgage payments. If the insured dies, the policy will pay the lender directly so the family can focus on grieving their lost loved one.

However, mortgage life insurance doesn’t give you the option to pick your beneficiary, and the death benefit can’t be used for anything but the mortgage balance. The premium doesn’t change even though the balance decreases over time. The insured’s loved ones won’t receive any payout, and it can be hard to do any comparison shopping since you can’t get quotes online.

Although mortgage life insurance has its benefits, it’s not the right fit for everyone.

Obtaining mortgage life insurance involves careful consideration of your specific needs and comparison of available options. Here's how you can get mortgage life insurance:

• Through a Mortgage Lender: Many mortgage lenders offer mortgage life insurance as part of the loan process. You can inquire about this option while finalizing your mortgage loan, and the lender may provide you with policy options directly.

• Through a Private Insurance Company: Some private insurance companies specialize in mortgage life insurance products. An agent from these companies can guide you through their offerings, helping you find a policy that aligns with your mortgage and personal needs.

• Through a Life Insurance Broker: Brokers working with various life insurance companies can be a valuable resource. They can help you compare quotes and evaluate mortgage life insurance against traditional term life insurance, ensuring you choose the best product for your situation.

• Consult a Financial Advisor or Life Insurance Professional: Before making a decision, it may be wise to consult with a financial advisor or life insurance professional. They can assess your overall financial situation, mortgage details and insurance needs to recommend the most suitable product.

• Shop Around and Compare Prices: Mortgage life insurance can vary in cost and coverage. It's advisable to shop around, compare quotes from different providers and carefully review the terms and conditions of each policy.

• Consider Your Health and Occupation: Mortgage life insurance might be more cost-effective for people with health conditions or a risky occupation since there's no medical exam or underwriting. Understanding how these factors influence the cost can guide your decision-making process.

Generally, regular life insurance is a better fit for most people than mortgage life insurance, especially for young or new breadwinners or those with a lot of financial obligations. Seniors may be the best fit for mortgage life insurance compared to other age groups.

Many people end up using life insurance to pay off a mortgage, but you can do that with any type of life insurance. Since mortgage life insurance is restricted to only paying off the mortgage, you can’t use it for anything else, including estate planning, and you can’t choose your beneficiary.

The restrictions of mortgage protection life insurance make it a poor choice for most people unless they have no other expenses to pay. Seniors in poor health may also consider guaranteed acceptance life insurance, which could be a better choice than mortgage life insurance.

There are various types of mortgage insurance policies, and mortgage protection insurance (MPI) is just one of them. While MPI is designed to pay off the mortgage balance in the event of death, other types of mortgage insurance, such as private mortgage insurance (PMI) and mortgage insurance premium (MIP), serve different purposes. Unlike MPI, PMI or MIP may be required by lenders in certain situations. Here's a closer look at these three distinct types of mortgage insurance:

Knowing what mortgage life insurance is and how it works can help you decide if it’s right for you. Here are some answers to the most commonly asked questions on the topic to aid in your search.