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Mortgage Life Insurance Explained

Mortgage life insurance exists to pay off the balance remaining on the insurance holder’s home loan in the event of their death. Mortgage life insurance is different from term life insurance because the lender is the policy beneficiary, requiring all proceeds be directed toward paying off the mortgage loan. With term life insurance on the other hand, any heirs get to decide where the proceeds go.

Mortgage life insurance is normally only offered by the lender at the time a borrower applies for the loan. Anytime a lender offers mortgage life insurance it is completely optional and does not affect the loan approval process or not. If you do choose to get mortgage life insurance, the payments are made monthly like other kinds of life insurance policies, except these are usually added to your mortgage payments. In return you get to rest easy, knowing that your home will be paid off if you die and there is a remaining balance left on your loan. These policies can be designed to cover the primary breadwinner of a family or written as a joint policy, covering both borrowers.

This mortgage life insurance is also not to be mistaken for private mortgage insurance (PMI), which is oftentimes required by lenders for borrowers with less than 20% to use as a down payment for the mortgage. PMI is different from mortgage life insurance in that PMI exists to protect the lender, not the borrower, in case the borrower defaults on their loan. There is no benefit to the borrower for PMI, it is oftentimes simply a condition that comes with the loan.

Let’s explore some of the pros and cons related to getting mortgage life insurance:

Pros:

  • You get the confidence in knowing your mortgage loan will not become a burden to any loved ones.
  • Health screening to be accepted is minimal (and sometimes non-existent), making it beneficial for those with poor health or older age.
  • Guarantees your mortgage will be paid, which can be comforting for those who do not trust their heirs to prioritize this.
  • Payments are conveniently combined with your mortgage payments, so they don’t have to be done separately.

Cons:

  • Since health screening is minimal, the cost of mortgage life insurance is more expensive. Younger people and those with good health are better off getting less expensive term insurance.
  • This type of insurance is considered “decreasing term insurance”, meaning you get less coverage over time as you pay down your loan balance. Term insurance on the other hand remains steady.
  • Mortgage life insurance does not offer alternative uses for proceeds like term life insurance does. For example, paying off car loans and credit cards with high interest might be considered more of a priority to the heirs than the mortgage, but mortgage life insurance proceeds will only be allowed to pay off the mortgage.
  • Every time you decide to refinance, you will normally have to reapply for mortgage life insurance and the rate will adjust to your age.

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