Affordable Life Insurance Protection for Your Family
Life Insurance to Protect Mortgage
If you're a new home owner, or considering the purchase of a home, you may be wondering about life insurance, and what type of coverage to buy to protect your home mortgage loan.
It’s an important question to consider and one you should decide on sooner rather than later.
Why? Because, you want to make sure your family can remain in your home should you die unexpectedly. The proceeds from a life insurance policy can be used by your beneficiary (spouse/family members) to pay off the remaining balance owed on your mortgage.
That way, your loved ones have the security of remaining in the home they shared with you.
And, you have the peace of mind knowing your family will have a home, after you’re gone.
What Type of Life Insurance Can Protect a Mortgage?
The most common type of life insurance policy used to provide protection for a home mortgage loan is Term Life Insurance.
Term Life offers the lowest cost coverage available, with protection to meet your specific needs – 10, 15, 20, 25 or 30 years.
Level Term insurance is used by many home owners with a mortgage, to guarantee their beneficiary will have the funds needed to remain in the home, should the insured person die.
Level Term Life Insurance
How Does Level Term Life Insurance Work?
It’s easy-to-understand. With a level term policy, you select the amount of coverage you need, and the duration of coverage – how long you need your life insurance protection to last.
You own a home with a mortgage of $300,000 and your mortgage loan is for 30 years.
In this example, you would buy a level term policy with a $300,000 death benefit, and a “term” (duration of coverage) of 30 years.
That way, if you die during the 30-year term, your beneficiary would be paid the death benefit of $300,000 which could be used to pay off the remaining balance owed on the mortgage for your home.
Do I Need Mortgage Life Insurance?
Legally, you don’t need to have life insurance to take out a mortgage for your home.
However, this doesn’t mean you should ignore the idea altogether. The purpose of life insurance is to help your spouse, partner, children or other dependents cope financially if you should die before your mortgage is paid off.
What is Mortgage Protection Insurance?
Mortgage protection life insurance is a policy sold by your mortgage company or bank that pays off your mortgage loan upon your death.
The beneficiary of this type of insurance policy is almost always the mortgage company.
Under some circumstances, that may be your preference.
But in many cases, it may work out better for your loved ones to receive the proceeds from your insurance policy themselves, giving them the choice of whether to pay off the mortgage loan or not. There may be more pressing financial needs than paying off the house right away.
Term Life Insurance for Mortgage Protection
Term life insurance coverage is often more competitively priced than mortgage protection insurance, and allows you to name your spouse and/or children as the beneficiaries of your policy, rather than the mortgage company.
Mortgage life insurance has other disadvantages, too.
The premium you pay is often lumped into the home loan, which means you are paying finance charges on the premium for your mortgage insurance.
A healthy nonsmoker can usually beat the price of mortgage life insurance by as much as 50 percent.
Another disadvantage is the insurance stays with the house.
In other words, it’s not transferable the way regular life insurance is. That means, if you are no longer living in the house (if you sell your home), you no longer have the life insurance protection.
Who Should Buy Mortgage Protection Life Insurance from the Mortgage Company?
People with Health Problems
If you are obese, have high blood pressure, are a smoker, have diabetes, or have other chronic health issues that may keep you from getting preferred rates or in some cases keep you from getting approved for life insurance, check out mortgage protection life insurance. It may be your only option.
You buy life insurance to minimize the financial impact of your death on your surviving loved ones who depend on your income to pay the bills (for example, your spouse and children).
Beware of Decreasing Payout
Some MPI policies do in fact offer policies that charge fixed premiums for the policy’s entire duration.
However, in many cases, the payout on these insurance policies may shrink over time as potential payouts decrease.
This type of mortgage protection life insurance is also referred to as Decreasing Term Insurance.
The amount of life insurance provided by the policy decreases each year, as the amount owed on your mortgage loan declines. Consequently, the MPI policy’s potential payout shrinks with every mortgage payment.
On the other hand, some newer Mortgage Protection Insurance products have a feature known as a Level Death Benefit, where death benefit payouts don’t decline over time.
For example, if you're covering a $200,000 mortgage loan, your beneficiary (not the lender) would receive the whole $200,000 payout, even if the mortgage debt has declined to $50,000.
And if you pay off the mortgage while the insurance policy is still In Effect, some policies allow you to convert your mortgage insurance into a life insurance policy.
Things to Consider:
Who Would Benefit from MPI Policies?
Mortgage protection insurance might benefit those who don't qualify for regular term life insurance plans because of poor current health since MPI is typically sold without any underwriting.
In these cases, those considering MPI coverage should compare price quotes from several insurance companies and check each firm's financial strength rating with A.M. Best, a rating company that ranks life insurers with letter grades indicating their financial strength and security.
If you want to avoid a declining payout MPI plan, you should opt for no-medical-exam term life policies (guaranteed issue) with level premiums and level death benefits.
Although these policies cost more and may offer lower coverage amounts than regular term life policies that review your medical history and conduct a physical examination, at least they’ll pay the same death benefit, whether you die 10 or 20 years into your mortgage.
Age Limits for MPI Policies
As with other types of life insurance, mortgage protection insurance may not be available after a certain age.
For example, State Farm only offers 30-year mortgage protection insurance to applicants of age 45 or younger (36 or younger in New York), and only offer 15-year mortgage insurance policies to those age 60, or younger.
Different from PMI Coverage
Mortgage protection insurance differs entirely from private mortgage insurance (PMI), which protects lenders, not you.
If you put down less than 20% on your home, you pay monthly premiums to a PMI policy that will pay your lender should you default on your home mortgage loan.
However, in the event of your death, your heirs must continue making mortgage payments, and PMI only kicks in if family members default on the loan.
The Bottom Line for Mortgage Protection
Those concerned about leaving behind large and costly mortgages to their loved ones should consider term life insurance, which is typically a superior solution to mortgage protection life insurance at more affordable rates.
Should You Buy Mortgage Protection or Term Life Insurance?
Private Mortgage Insurance
PMI (Private Mortgage Life Insurance) – PMI is what is required by your bank or lender if you aren’t able to make a down payment (typically 20%) when purchasing or building a new home.
Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan.
It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.
Typical rates for MPI coverage are $55 per month per $100,000 financed loan, or as high as $1,500 per year for a typical $200,000 mortgage loan.
What is Mortgage Protection Life Insurance?
Mortgage protection life insurance is an insurance plan that will not be offered by your insurance agent- most likely it will be offered by your bank.
If you have recently bought a new home or refinanced, chances are your mailbox has been flooded with offers to insure your home.
Before you decide to buy it or not, let’s find out what it exactly is.
The amount of coverage that is purchased is the amount of your loan where if something happened to you the bank would be the beneficiary and pay off the loan.
In most cases, the policy is a decreasing term, where as the years go by the amount of insurance reduces as you’re paying your home loan down, although the premium you pay stays the same.
One Advantage is obtaining life insurance with few questions to answer and almost no underwriting.
The main Disadvantages are the cost is higher than level term, but mortgage life is decreasing term and pays no benefits to the borrower. It pays the benefit to the bank to pay off the mortgage.
You may want to look into level term before deciding on either one to compare the cost and benefits.
You may prefer to have the benefits paid to the beneficiary and then they can decide how to use those funds.
When Does Buying Mortgage Life Insurance Makes Sense?
Mortgage Life Insurance is considered to be a simplified issue product meaning that you don’t have to go through a series of medical screens and blood work to get approved.
For somebody that has pre-existing conditions, it could make sense.
Also, if somebody doesn’t want to go through the hassle of filling additional tons of forms and having a nurse come to your home, it could make sense.
Please Note: There are term insurance products that are called No Exam Life Insurance that might be a suitable option compared to mortgage life insurance.
How Do the Premiums on Mortgage Life Protection Insurance Compare to Level Term?
Mortgage protection life insurance is sold out of convenience.
That extra convenience means the cost tends to be higher because the underwriting process can’t be as precise.
With a more precise underwriting process, most level term life policies will tend to be less expensive than a comparable mortgage life policy.
Should You Buy Mortgage Protection Insurance or Term Life Insurance?
It really depends on your personal situation and needs.
In most situations purchasing term life insurance makes more sense than purchasing MPI life insurance.
If the purpose for your life insurance coverage is to pay off your mortgage and to take care of your family, then take a serious look at term life insurance as an option.
When you do go to get quotes, be sure to shop around and compare rates from several of the leading life insurance companies.
Your age and health, among other factors, will determine which insurance carrier will have the best rate for you.
Mortgage Life Insurance Quotes
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Here are some helpful resources to assist you in learning more about your options for life insurance related to protecting your home mortgage loan:
Term Life Insurance – Learn how a term life insurance policy works.
Mortgage Payoff Life Insurance – Learn about life insurance to payoff your home mortgage loan upon your death.