Do I Need Mortgage Life Insurance?

In this article:

• What is Mortgage Life Insurance?
• Advantages of Mortgage Life Insurance
• Disadvantages of Mortgage Life Insurance

What is Mortgage Life Insurance?

Mortgage life insurance is a policy designed to pay off the remaining loan balance on the insured person’s home in case of death. The major difference between mortgage life insurance and a term life insurance policy is that the lender is named as the beneficiary of the policy so the proceeds must be used to pay off the mortgage; whereas, with a term life policy, the heirs decide what to do with the proceeds.

Mortgage life insurance is typically offered initially by your lender at application time. It’s important to note that by law this offer is purely optional and has no bearing on whether the loan is approved or not. It works like other life insurance policies, in that you make monthly payments (usually included in your monthly mortgage payments) in exchange for the peace of mind that your home will be paid off if you die and there is still a balance due. Mortgage life insurance policies can be structured to cover the breadwinner of the family or, if needed, a joint policy can be written to cover both borrowers.

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Is mortgage life insurance the same as mortgage insurance?

Mortgage life insurance is not the same as mortgage insurance (PMI or MI). Mortgage insurance is a requirement from your lender if you do not have 20 percent or more equity or down payment in the mortgage transaction. Unlike mortgage life insurance, mortgage insurance is a risk insurance that covers the lender for the top part of the loan in case of a borrower’s default. It has no benefit for the borrower. The borrower is required to pay for it as a condition of the loan.

Mortgage life insurance has various advantages and disadvantages depending on one’s specific scenario, some of which are included below:

Advantages of mortgage life insurance

• Mortgage life insurance gives you the “peace of mind” that your mortgage loan will not be a burden on your loved ones.
• Mortgage life insurance normally requires little to no health screening for acceptance. This may be great for people with pre-existing conditions, in poor health or in old age.
• It is a way to designate that the mortgage debt be paid, which is beneficial if you don’t trust your heir’s judgment to classify this as a priority.
• It’s a convenient payment option. Mortgage life insurance is included in your monthly mortgage payment, so no separate payment has to be sent.

Disadvantages of mortgage life insurance

• Since mortgage life insurance has limited health screening, this makes the cost of the insurance relatively expensive. Young people and people in good health will most likely be able to get term insurance at a lower cost.
• Mortgage life insurance is designed as a decreasing term insurance – which means the amount of coverage goes down as you pay off the mortgage (term life insurance remains steady) and you get less coverage as time elapses.
• Unlike mortgage life insurance, term life insurance offers heirs of the estate other options for the proceeds. For instance, it might be in their best interest to pay off high interest credit cards or car loans in lieu of the mortgage.
• Life insurance rates are based upon the age of the insured. Every time you refinance, you typically have to reapply for the mortgage life insurance and your new rate will correspond to your new age.