A mortgage life insurance policy is an insurance policy designed specifically to repay mortgage debt in the event of the death of the borrower. These policies differ from traditional life insurance policies. With a traditional policy, the death benefit is paid out when the borrower dies. A mortgage life insurance policy, however, doesn't pay unless the borrower dies while the mortgage itself is still in existence.
There are two basic types of mortgage life insurance: decreasing term insurance, where the size of the policy decreases with the outstanding balance of the mortgage until both reach zero; and level term insurance, where the size of the policy does not decrease. Level term insurance would be appropriate for a borrower with an interest-only mortgage.
Before buying mortgage life insurance, a potential policyholder should carefully examine and analyze the terms, costs and benefits of the policy. Remember, there are two lifespans to consider – the lifespan of the policy holder and the lifespan of the mortgage. It's also important to investigate whether one could get the same level of coverage for your family at lower cost – and with fewer restrictions – by buying term life insurance.
Don't confuse mortgage life insurance with private mortgage insurance, a product that people who take out a mortgage for less than 80% of the value of their home are required to buy.
Mortgage life insurance provides near-universal coverage with minimal underwriting. There is often no medical examination or blood sample required and can be a valuable insurance policy option for any homeowner with serious preexisting medical conditions which, would prevent them from buying traditional life insurance.
Other advantages include:
A mortgage-free home in the event of death, illness or disability that prevents work. With a mortgage life insurance policy in place, heirs won’t have to worry or wonder what might happen to the family home. If a policyholder dies or become gravely ill and unable to work, the mortgage life insurance policy will pay off the entire mortgage loan.
A policyholder doesn't need to die to take advantage of coverage. With some exceptions, most traditional life insurance policies will not pay out unless you die within your coverage period. Most mortgage life insurance policies, on the other hand, offer coverage which works if you become disabled or unable to work, which makes this type of insurance a bit more versatile than a traditional term or whole life policies.
Policyholder peace of mind. This coverage relieves a policyholder's worries about family having a place to live if you die or cannot work. With the mortgage paid off, the family will always have a place to live, provided they can afford the property taxes and insurance each year.