Mortgage Life Insurance: What It Is and How It Works
By, Finance Writer & Licensed Insurance Agent
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.
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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.
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 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.
Term life insurance provides a death benefit for a set number of years, usually 10–30 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?
The death benefit of a mortgage life insurance policy is intended solely to pay off the remaining mortgage balance and decreases along with the loan balance. Unlike other types of life insurance, which allow 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.
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 that they qualify more easily for mortgage protection life insurance than other forms of life insurance that require a medical exam.
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.
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.
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.
What Mortgage Life Insurance Covers
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.
What Mortgage Life Insurance Doesn’t Cover
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.
How Much Does Mortgage Life Insurance Cost?
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.
Common Factors Affecting Mortgage Life Insurance Costs
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 age of the insured is a significant factor in determining the cost of mortgage life insurance. Generally, younger individuals may qualify for lower premiums because insurers consider them as lower risk. As age increases, so does the likelihood of health issues, leading to higher premiums.
The location of the property can influence the cost of mortgage life insurance. Insurers may consider factors such as the cost of living, local health statistics and regional regulations. Different areas may have varying risk profiles, affecting the overall cost of the policy.
The length of the mortgage term directly impacts the duration of the insurance coverage. A longer mortgage term may result in higher premiums, as the insurer is committing to a more extended period of potential risk.
The remaining balance on the mortgage is a critical factor in determining the cost of mortgage life insurance. A higher loan balance means a higher potential payout, leading to increased premiums.
Answers to Application Health Questions
Mortgage life insurance applications may include health-related questions. The answers to these questions help the insurer assess the applicant's overall health and potential risk. Pre-existing conditions or health concerns may lead to higher premiums.
Any Riders You Select (if available)
Riders are additional coverages or benefits that policyholders can add to a standard plan. Common riders might include disability coverage, unemployment benefits or a return of premium option. Selecting riders means a potentially higher payout from the insurer, leading to higher premiums.
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.
Pros and Cons of Mortgage Life Insurance
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.
Pros and Cons
- 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 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.
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.
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.
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.
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.
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 required. However, if you’re young or in great health, you could get a cheaper rate if you complete the life insurance medical exam.
You’re a senior
Mortgage life insurance may be the best fit for seniors 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.
How to Get Mortgage Life Insurance
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.
Additional Considerations Before Buying a Policy
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.
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.
MPI vs. PMI vs. MIP
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:
Mortgage protection insurance, or mortgage life insurance, provides a layer of financial protection to the borrower's heirs if the borrower dies while owing mortgage payments. It pays out directly to the lender. It's an optional insurance that borrowers can decline, though they may need to sign waivers verifying their decision.
Lenders may require private mortgage insurance when a borrower makes a down payment of less than 20% on a conventional mortgage loan. It protects the lender against default. You, as the borrower, may request cancellation of PMI once your principal balance reaches 80% of the original value of your home.
Homeowners with Federal Housing Administration (FHA) loans may need to secure mortgage insurance premium. Similar to PMI, MIP protects the lender against default but is specific to FHA loans. The borrower pays an upfront fee and a regular fee combined into their mortgage payments. Unlike MPI, MIP doesn't provide any death benefit or protection for the borrower's family.
Frequently Asked Questions
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.
About Mandy Sleight, Licensed Insurance Agent