Mortgage life insurance, also referred to as mortgage protection life insurance, ensures that your mortgage balance will be paid in full in the event of your death. This can be very valuable insurance as it means that your family or surviving heirs do not have to worry about making monthly mortgage payments or paying off your home loan.
Purchasing a Mortgage Life Policy
You can purchase a policy from any insurance company that offers this type of coverage. You can take out an insurance policy at the same time you get your mortgage loan or at a later date. Mortgage lenders often pitch this coverage to customers as something to add-on at closing through an insurance company the lender has a relationship with. Of course, you are free to purchase this type of coverage from any insurance company you choose. State Farm and Vantis Life are a few examples of insurance companies that offer this type of policy.
Regardless of whether you purchase coverage at the time of closing or a later date, the amount of coverage varies based on the amount of money you owe on your mortgage. The death benefit reduces over the life of the policy, because the balance owed on your mortgage should decrease over the life of the policy as well. This coverage is not intended to provide the beneficiaries with a surplus of cash, but rather simply to ensure that the home is paid for in the event of the borrower's death.
Factors That Impact Premiums
The insurance premium you will pay for mortgage insurance policies will vary depending on the specifics of your situation. Premiums for this type of coverage are generally determined by the same factors that impact overall life insurance rates, added to the amount of coverage needed to cover the mortgage loan amount. Common factors include:
- Amount of the mortgage loan
- Policyholder's age
- Policyholder's health
- Tobacco use
Premiums do not necessarily stay the same throughout the length of the policy. Your policy will include details of how premiums many adjust, so be sure to read all the fine print. In most cases, there is a time period early in coverage during which premiums cannot fluctuate. A cap amount that cannot be exceeded may also be set for the time the policy is in place. Medical exams aren't always required, but you need to supply verifiable information about your health status. If your health isn't good, it may have a significant impact on the price you pay for this type of insurance.
Cash Money Life points out some mortgage life insurance policies include disability riders, which would provide coverage of monthly mortgage payments if the policyholder becomes disabled. You can also add-on protection for a second individual, such as a spouse. This option allows you to, as Insure.com points out, "get joint coverage for both you and your spouse. This means the death benefit will be paid when either of you dies."
When to Consider Mortgage Life Coverage
Though mortgage protection life insurance can very valuable, it may not be necessary (or advisable) if you have, or can get, a regular term life or whole life insurance policy. These policies will provide your beneficiaries with a payout of funds following your death that isn't tied specifically to your mortgage. You could, of course, get coverage high enough to cover your mortgage, but you could also opt for a higher amount that would provide additional funds.
In either case, with a term or whole life policy, your beneficiaries can decide what is best for them to do with the money. The life insurance settlement funds from this type of policy can be used for any purpose. It could go toward paying off the mortgage, but could also be used to cover other expenses or simply to provide the beneficiaries with a sum of cash.
According to ValuePenguin, health is a key factor to consider in determining whether a mortgage-specific policy might be advisable. They advise that regular term life insurance is likely a better option for homeowners who don't have significant health issues and who are young enough to get affordable term or whole life rates.
However, if your health is a barrier to qualifying for a regular policy, a mortgage life policy can be a good option. ValuePenguin points out that for people who "have severe enough health problems to not qualify for term life insurance, mortgage life insurance will offer larger death benefits than many alternatives."
Other Eligibility Factors
Of course, health isn't the only reason someone can be turned down for life insurance coverage. Factors other than health problems such as hazardous employment or risky hobbies could render you ineligible for a standard life insurance policy. However, in such a situation, you may still be eligible for a mortgage life policy.
Affordability is another factor to keep in mind when deciding if this type of insurance is a good option for you. Premiums for this type of life insurance may be less than the premiums paid for regular life insurance policies. If you are on a budget and your primary concern is providing your beneficiaries with a paid-for house, mortgage protection life insurance may provide you with an affordable solution. It's certainly better than having no protection for your family.
Making Your Decision
While the decision on whether you need this type of insurance is a personal one, it is one that you should not make lightly. Investopedia cautions that companies that promote these types of insurance products often use "scare tactics and emotional pleas," offering their policies as the ideal solution. However, this type of coverage is not the best option for everyone. Thoroughly research any policy you are considering and carefully evaluate the various options in light of your specific situation. Don't just compare mortgage life policies, but also consider if there is a more flexible life insurance product that might provide better protection for your family.