Mortgage life insurance
What is mortgage life insurance?
Mortgage life insurance is a type of insurance product that pays off a mortgage if the borrower dies.
For most individuals, it does not make sense to take out mortgage life insurance. When you take out a policy, the bank that holds your mortgage is nearly always the beneficiary. If you die, it probably doesn’t matter to you whether or not you still owe on your mortgage. These policies protect the lender, not the borrower.
If you believe that your spouse or family will want to keep the house after your death, there are better insurance products that make this a possibility. Term life insurance pays the policy proceeds to your beneficiary in a lump sum. Then, your beneficiary has the option to pay the mortgage off if he or she wants to keep the home.
All conditions being equal, mortgage life insurance is more expensive than term life insurance. Other than the cost, it is a poor value due to the inflexibility of the product and its declining value over time.
The insurance may only be used to pay off your mortgage. Over time, you will make regular mortgage payments, decreasing the amount of your mortgage. However, the premium for your mortgage life insurance usually stays the same. This means that your insurance coverage decreases, but you continue to pay the same premium.
One of the few instances when mortgage life insurance is a smart decision is when you are unable to secure approval for traditional life insurance. Mortgage life insurance does not require a medical exam for approval.
Mortgage life insurance example
If you take out a mortgage, you’ll have the option to buy mortgage life insurance. Assume that you take out a mortgage for $250,000. Due to extensive medical problems, term life insurance companies will not approve you for a policy. You want your spouse and children to be able to stay in the home after you die, so you buy a mortgage life insurance policy that pays the loan off if you die.
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