Making end-of-life plans, such as writing a will and purchasing life insurance, can relieve your family of logistical burdens and debt obligations when you die. Buying mortgage insurance is a way to get rid of the balance of the mortgage when you die, so your spouse, children, and other loved ones can live at home with one less bill to worry about.
Here, we discuss what mortgage insurance is, what it covers and how it compares to standard life coverage.
What is mortgage life insurance?
Mortgage insurance is a Life insurance policy Where your mortgage lender is the beneficiary who receives the insurance payment upon your death, and that money is used to pay off your mortgage. Unlike a standard life insurance policy in which the beneficiaries such as a spouse or children can decide how to use the lump sum of the death benefit, mortgage insurance is specifically designed to provide funds to get rid of mortgage debt.
Mortgage life insurance is sometimes called Mortgage Protection Insurance, or MPI — but it’s different from Private Mortgage Insurance, or PMI. Private mortgage insurance protects your lender against loss if you default on mortgage payments, and is usually required if you file down payment less than 20% when buying a home. By comparison, mortgage life insurance is designed to provide financial support to loved ones after the death of the borrower.
What does mortgage life insurance cover?
Mortgage life insurance may be offered by your mortgage company or through separate insurance companies. Here’s what you cover:
Pay off the mortgage
The mortgage insurance payout covers your mortgage balance. This means that your family should continue to live in the home owning it free and clear.
While a health check is not necessary to obtain mortgage insurance, the premiums may be higher than on a standard life insurance policy. The face value of mortgage insurance also decreases over time as you pay off the mortgage.
For example, if you bought a policy today owed $500,000 on your mortgage, but only owed $400,000 when you died, $400,000 would be the value of your policy at the time of death, and that’s what will be saved to pay off your debts.
Disability benefits and job loss
In some cases, a real estate life insurance company may offer mortgage payments temporarily if you lose your job or become disabled. Therefore, it may benefit you to also get coverage while you are alive.
Life insurance restrictions
Paying your mortgage upon your death may seem like a difficult proposition to pass up, but there are potential drawbacks. Mortgage insurance gives spouses and other family members less flexibility in using insurance payments for other expenses. If your partner needs the money to pay for medical bills, funeral expenses, or other living costs, mortgage insurance won’t cover it.
Let’s say your mortgage payments are low and manageable. It may make more financial sense for the beneficiary to keep the mortgage payment and use the death benefit of the life insurance policy in order to cover other costs, such as college tuition for when your children head off to school. Furthermore, the decreasing coverage aspect of mortgage insurance means that you can pay the same amount for less coverage over time.
Life Insurance vs. Mortgage vs. Term Life Insurance
Mortgage insurance is a type of life insurance policy. The main difference is the recipient. Unlike mortgage insurance, term life insurance pays your chosen beneficiaries if you die within a specified period of 10 to 30 years, and the money can be used in any way your beneficiaries see fit. Here are the pros and cons of life insurance versus mortgage versus life insurance.
The pros and cons of real estate life insurance
- No medical examination: You do not have to undergo a health evaluation, which can make this type of policy an option if you cannot get other insurance for health reasons.
- Pay off your mortgage debt: Knowing that your mortgage will be paid off when you die can mean you can take less stress over dealing with your credit during your lifetime.
- Family members are allowed to live in a home without a mortgage: Your family can keep the home without having to deal with mortgage payments when you die.
- the cost: Mortgage life insurance may cost more than other insurance policies.
- Their loved ones do not receive insurance benefits: The money from your insurance goes to the mortgage company to cover the balance of the home loan and not to your spouse or children.
- Limitations on how funds can be used: A death benefit covers your mortgage, so it cannot be used to pay bills or final living expenses that may come after your death.
The pros and cons of life insurance
- Affordable installments: Depending on your age and health, life insurance policies may be more affordable than mortgage insurance.
- Flexibility: Recipients receive a death benefit and have the option to pay the mortgage balance or cover other living expenses.
- A health check may be required: The insurance company may request that you schedule a health evaluation before offering life insurance coverage.
- Conditions have limitations: Life insurance usually covers a period of 10 to 30 years. If you don’t die within that time, your coverage will end, or you may have the option to renew or extend at a higher fee.
- No monetary value: Whole life policies It is a type of life insurance policy that lasts your whole life rather than a fixed period. These policies may cost more, but you get other benefits, such as cash value that grows with premium payments and that you can take advantage of over your lifetime.
A mortgage life insurance policy can provide financial protection to family members who may struggle to keep up with mortgage loan payments after losing your source of income. However, many types of life insurance products exist to ensure that dependents are left on a stable financial footing.
Death takes advantage of Life insurance or whole life insurance policies You may save enough money to pay off the mortgage while leaving some money left over to use for expenses or build wealth. Getting life insurance quotes to review terms and costs from multiple providers can help you make the right choice for your family.
Taylor Medine She began blogging about her $1 experience in 2013 as a recent college graduate. Eventually, that passion grew into a career studying and demystifying personal finance topics for people like her—the everyday consumer. When she’s not writing, you’ll find her looking for travel deals or trying (and often failing) a DIY project.
Tori Addison He is an editor with over five years of experience in digital marketing. Includes communications and marketing work in the non-profit, government and academic sectors. A journalist by trade, she began her career covering politics and news in New York’s Hudson Valley. Her work has covered local and state budgets, federal financial regulations, and healthcare legislation.