Mortgage Life Insurance (Explained)

Becoming a homeowner is a thrilling next step in many people’s lives. Renovating, decorating, and housewarming parties can create fond first memories, especially if you’ve been looking forward to owning your own home. With ownership comes responsibility, and there are an overwhelming number of things to consider when purchasing a house for the first time. 

Homeowners insurance is often discussed as a must, but you may not have heard about mortgage life insurance before. Mortgage life insurance differs from traditional term or permanent life insurance, so it’s important to know the difference, especially if you have medical concerns. 

There are pros and cons to consider regarding life insurance for mortgages, especially given your circumstances. A young family with children and an extensive medical history may have more at stake than a healthy but older couple with no children and little debt. 

We’ll go over what you should consider when looking at life insurance for mortgage protection, including what sort of policy you should aim for and the benefits and downsides of this type of insurance. 

What is mortgage life insurance? 

Mortgage life insurance protection is exactly as straightforward as it seems. When you purchase mortgage life insurance, it means that you have a specific life insurance policy that protects your family and loved ones if you pass away before you finish paying off your mortgage. Banks often offer it, and only those associated with independent insurance companies and specific lenders. 

Traditional life insurance will often have a death benefit that is paid out to the beneficiaries of the deceased. The amounts vary depending on the type of life insurance policy that was purchased. This is also why the cost of life insurance also varies. However, with a mortgage life insurance policy, the payout is only for the mortgage amount. You name your beneficiaries, and in the event of your passing, they are the ones who will be given the payout.

However, the money is only used to pay off the mortgage in your name. This means that your beneficiaries do not actually receive the money and cannot use it for other means. The money often goes directly to the lender.

The payout is also only provided if the loan on the property still exists, and it will only be paid off if the borrower is deceased. 

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Are there other types of mortgage insurance? 

Mortgage life insurance is also vastly different from standard mortgage insurance. Mortgage insurance protects a lender and is sometimes required when purchasing a mortgage. It’s to ensure that, should the person purchasing the mortgage no longer be able to afford payments, the lender wouldn’t be on the hook for any remaining financial debt. 

So while mortgage life insurance protects the property owner and the holder, a standard mortgage insurance policy protects the lender. So if you’re searching for mortgage insurance in case of death, double-check that the payout goes toward your mortgage. 

Another option is private mortgage insurance or PMI. This is often required if you make a down payment of less than 20% of the mortgaged amount and is done so that the lender protects themselves in the event you default on the loan. 

Are there any scams associated with mortgage life insurance? 

Unfortunately, scam artists will find any means to trick unsuspecting victims into giving up their information. There is a reason why insurance rebating is illegal and why you need to be careful when it comes to giving out your personal information. (For more information, read our “Life Insurance Rebating (Terms Explained)“).

If you’ve paid off your mortgage and you suddenly start getting phone calls or letters in the mail frantically demanding you purchase a mortgage life insurance policy, chances are it’s nothing but a scam.

The scam often includes fear-inducing tactics, such as warning you that you’re running out of time to apply or telling you that your loved ones will suffer financial ruin if you don’t take out a policy. 

What are the offered types of mortgage life insurance? 

In the same way you have options for auto or homeowners insurance, you can choose what type of mortgage life insurance policy you want. 

You may also see this type of coverage referred to as mortgage protection life insurance or mortgage protection insurance policies. As mentioned above, just make sure that when you buy a policy, it will protect you, not your lender.

You have two choices when it comes to mortgage life insurance: 

• Declining payout policy. With a declining payout policy, the more your mortgage you have paid off, the less the payout will be. The amount of the payout in this policy matches the mortgage loan. 
• Level-term policy. With a level-term mortgage life insurance policy, the amount of the payout stays the same and doesn’t decrease no matter how much of your mortgage you’ve paid off. 

The cost of the premiums for these two policies will vary, so you will want to look at quotes and see which is the most cost-effective for you based on your circumstances.

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What are the benefits of having a mortgage life insurance policy? 

As with many other types of insurance, purchasing a policy has benefits and downsides. If you cannot obtain life insurance due to medical reasons, you may consider a mortgage life insurance policy as an alternative. Regular or private health insurance with pre-existing conditions should never be impossible to find, but life insurance is a different story. Some pre-existing conditions can cost higher premiums, and some companies may deny you coverage entirely. 

However, with a mortgage life insurance policy, you’re not required to take a medical test, so signing up is easier, saving time and effort. Another benefit is that with this policy, your beneficiaries will not risk losing the home after your passing. 

Are there any disadvantages to mortgage life insurance? 

Unfortunately, there are quite a few downsides to this type of policy. They can be expensive and less flexible than other types of life insurance. Your beneficiaries won’t be able to use the payout for other bills or more urgently needed matters, as the money only correlates to what is left on the loan. 

What you pay for this type of policy is also going to be more expensive than a standard life insurance policy, and that’s even with a declining payout. So you’ll pay more in premiums, but you’ll end up with a smaller payout if you’ve already paid for most of your loan. 

Is mortgage life insurance required? 

The good news is that this isn’t a required form of insurance you’ll need when purchasing a home. Often, it’s recommended that you stick with either term life or whole life insurance. These policies tend to be more flexible, allowing your beneficiaries to use the payout wherever the money is needed, and the monthly payments are often lower as well. 

Mortgage life insurance comes with higher premiums, which means that if you’re a young homeowner with no medical history, you’ll be paying more than if you had term life coverage. 

A mortgage life insurance premium will also change, with no fixed rates like other policies. 

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Should you purchase mortgage life insurance?

Whether or not you need mortgage protection life insurance will depend on your circumstances. Age and the amount of money you’ll need are both factors to consider when looking into policies. 

Some mortgage life insurance lenders look at age first. For example, a 30-year-old homeowner may have different choices from a 65-year-old. This is often because of the timelines associated with the policies. There are 15-year and 30-year mortgage life insurance policies available, and a 30-year policy might not be the right choice for someone in their 60s. 

Some insurers will only work with younger homeowners, so it’s best to request a quote and provide as many details about yourself as possible before deciding on a company. 

Case Studies: Exploring Mortgage Life Insurance Scenarios

Case Study 1: The Young Family

John and Sarah, a young couple with two children, recently purchased their first home. They have a substantial mortgage and are concerned about the financial security of their family if something were to happen to either of them. Mortgage life insurance chosen to protect house for beneficiaries.

Case Study 2: The Elderly Couple

Robert and Elizabeth, an elderly couple with no children and little debt, have almost paid off their mortgage. They consider mortgage life insurance as an additional protection to cover the remaining amount on their loan. Higher premiums valued for peace of mind, ensuring home payoff upon death.

Case Study 3: The Medical History Challenge

Emily, a single homeowner with an extensive medical history, finds it difficult to obtain traditional life insurance due to her pre-existing conditions. She explores mortgage life insurance as an alternative and discovers that she can secure coverage without undergoing a medical test. 

The Bottom Line: Mortgage Life Insurance

Whether or not you end up with a mortgage life insurance policy will be entirely up to you. It’s not required, and in some cases, term or whole life insurance might be a better fit. If this type of policy seems to suit your personal needs and protect your loved ones, do yourself a favor and get quotes before committing. 

Comparing prices on an expensive policy could save you some money. If you look at company reviews as well, you can often get a feel for the type of customer service you’ll receive even before you become a policyholder.

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