Life Insurance
A type of term life insurance, mortgage life insurance pays out if the insured dies before paying their mortgage in full. Mortgage protection life insurance is usually a decreasing term life insurance policy. As the loan balance decreases, so does the death benefit amount.
Although home mortgage life insurance may be a good idea in some 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, but with mortgage life insurance, the lender is the beneficiary.
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Key Takeaways
Mortgage life insurance pays the death benefit directly to the lender to satisfy the mortgage if the insured dies before the balance is paid in full.
People without other financial obligations or who are in poor health may be the best fit for mortgage protection life insurance.
Buying term life insurance is usually cheaper for most people. It also allows you to choose your own beneficiary and cover other expenses besides the mortgage.
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What Is Mortgage Life Insurance?
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 the mortgage is completely paid off, your dependents don’t have to worry about paying it off or having to sell the house to satisfy the loan.
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Term life insurance provides a death benefit for a set number of years, usually 10 to 30 years. For example, if you buy a 20-year term life insurance policy and die in year 15, your beneficiary will receive the face amount as the death benefit. Each life insurance company offers different rates, so getting several quotes to compare can help you find the best rate for term life insurance.
How Does Mortgage Life Insurance Work?
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?
Death benefit
The death benefit of a mortgage life insurance policy is solely to pay off the remaining mortgage balance. It decreases along with the loan balance. Unlike other types of life insurance, which allows you to choose a beneficiary who can do whatever they want with the money, mortgage protection life insurance pays directly to the lender, and your dependents get nothing from the policy.
Eligibility
Depending on the type of life insurance you get, you might have to complete a medical exam to determine if you’re eligible for coverage and what your rate is. With mortgage life insurance, there usually isn’t a medical exam, so some people might find they qualify easier for mortgage protection life insurance than other forms of life insurance that require a medical exam.
Cost
Since a medical exam isn’t typically part of the qualification process, the cost of mortgage life insurance can be more expensive if you’re in good health. However, if you’re in poor health, mortgage life insurance costs can be cheaper compared to other life insurance policies that use health as a rating factor.
Cash value
There is usually no cash value in decreasing term life insurance for mortgage protection because it’s considered a term policy, which doesn’t offer cash value. It’s rare to find mortgage life insurance as a permanent life insurance policy, which is a type of life insurance that has a cash value component.
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Mortgage life insurance doesn’t allow you to choose your own beneficiary. If you die and have a mortgage protection life insurance policy, the lender is the beneficiary and will receive the death benefit. If life insurance is needed for a mortgage and other financial obligations, like college or income replacement, a regular term life insurance may be a better fit.
How Much Does Mortgage Life Insurance Cost?
The cost of mortgage life insurance can be more expensive than term life insurance if you’re in good health since health is not as much of a factor. But if your health is poor, you might save with mortgage protection life insurance compared to a regular term life insurance policy with a medical exam.
For instance, a 20-year term life insurance policy can cost anywhere from $278.93 to $3,425.60 per year — or $23.24 to $285.47 monthly. The rate depends on your age, gender, health, lifestyle and other criteria.
How much mortgage life insurance is per month depends on several factors, including your:
- Age
- ZIP code
- Mortgage term
- Loan balance
- Answers to application health questions
- Any riders you select (if available)
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Although mortgage life insurance could be a cheaper alternative for people in poor health, it may not be the best choice for those in good health. If your health is good, you might want to consider buying term life insurance instead, even if you’re just using life insurance to pay off your mortgage. Comparing quotes for term life insurance vs. mortgage protection life insurance can help you decide which policy is the best choice for you.
What Are the Pros and Cons of Mortgage Life Insurance?
The major benefit of mortgage life insurance is paying 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 of taking out a mortgage life insurance policy.
- Pays out directly to your mortgage lender
- Can be cheaper for those in poorer health
- No medical exam
- May offer riders
- Heirs can stay in the family home
- Mortgage balance is paid in full
- Your loved ones don’t get anything from the payout
- Can’t be used for final expenses or anything else
- Decreasing payout but fixed premium
- Can be expensive for those in good health
- Insured can’t choose the beneficiary
- Can’t get quotes online
- Hard to do any comparison shopping
Mortgage protection life insurance might be cheaper for people in poor health who don’t want to take a medical exam. It 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. The insured’s loved ones won’t see any benefit, 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.
Should You Purchase Mortgage Life Insurance?
You should consider purchasing mortgage life insurance if you have health problems and don’t want to take a medical exam. If you’re buying life insurance for the mortgage payoff and don’t have other debts, mortgage protection life insurance might be worth it. But if you’re young and healthy or the primary breadwinner with major life expenses and other financial obligations besides your mortgage, regular term life insurance is probably best.
If any of the scenarios below fit your situation, you might want to consider mortgage life insurance.
1
You’re paying for a mortgage
If you have a mortgage and are a high-income earner, mortgage life insurance may be a great choice to free your loved ones from paying the premiums after you’re gone. However, mortgage protection insurance usually has higher premiums than term life insurance, so it’s not the best choice for low-income earners.
2
Your other financial obligations are minimal
Most people buy life insurance to pay for multiple obligations, such as a mortgage, car payments, children’s tuition and college expenses, income replacement and final expenses. But if you have minimal or no other financial obligations, mortgage life insurance may be a good fit.
3
You want to guarantee the money goes toward your mortgage payments
With regular life insurance, your beneficiary can use the death benefit for whatever they want, regardless of your wishes. Mortgage life insurance guarantees your lender will receive the payout since they’re listed as the policy beneficiary.
4
You’re not in the best health
If you have health issues, you could get a cheaper rate for mortgage insurance vs. life insurance elsewhere since there is rarely a medical exam. But if you’re young or in great health, you could get a cheaper rate if you complete the life insurance medical exam.
5
You’re a senior
Mortgage life insurance for seniors may be the best fit since there is a greater chance of health problems and minimal other financial obligations. Depending on the company and policy, there may be an age limit with mortgage life insurance.
Mortgage Life Insurance vs. Regular Life Insurance
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.
Compare Life Insurance Rates
Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.
Frequently Asked Questions
Knowing what mortgage life insurance is and how mortgage life insurance works can help you decide if it’s right for you. Getting answers to the most commonly asked questions on the topic may aid in your search.
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About Mandy Sleight, Licensed Insurance Agent
