A mortgage life insurance policy pays out in the event of your death.
It helps to cover the debt of a remaining mortgage owed to the mortgage lender. This allows your family to keep their home without having to worry about making mortgage payments.
As a result, mortgage protection insurance can be beneficial for anyone with a mortgage.
Want to learn more about how mortgage insurance works, how it pay out upon death, and whether it's right for you? Read more to find out.
What is Mortgage Protection Insurance?
Mortgage protection insurance, also known as Mortgage Life Insurance, is a life insurance policy that pays off your mortgage debt if you pass away. While this policy can keep your family from losing their home, it’s not always the best life insurance option.
With mortgage insurance, your mortgage lender is the policy’s beneficiary. This means your loved ones don’t receive a death benefit if you pass away during the policy’s term. Instead, the lender uses the mortgage insurance death benefit to pay off your remaining mortgage balance.
The monthly cost of your mortgage insurance never changes, but the policy’s value decreases as your mortgage is paid off overtime. This differs from a life insurance policy, which pays out a death benefit amount that never changes.
Does Mortgage Protection Insurance Cover Death?
Mortgage insurance DOES pay out upon your death. However, the payment goes to your lender (not your family). The lender uses pays off the outstanding balance of the mortgage through this insurance policy.
Some insurance companies will allow you to convert your mortgage insurance into a life insurance policy, while others will allow you to add life insurance riders to help with living expenses.
What Does a Mortgage Life Insurance Policy Cover?
Mortgage life insurance is different from traditional life insurance in that it can only be used to pay off your mortgage. The payout can't be used to cover other expenses, like final medical bills or funeral costs.
Traditional life insurance policies allow your family to use the money however they wish. For this reason, it is important to make sure that you have enough insurance coverage to pay off your mortgage in full in the event of your death. Otherwise, your family may be left with a large debt that they are unable to pay off.
Mortgage life insurance typically does not require a medical exam and may not include any health questions.
It may be a good option if you have existing health conditions, which make it difficult for you to qualify for life insurance.
How does mortgage protection insurance work?
The policy will typically last for the duration of your mortgage, and the premiums can be rolled into your monthly mortgage payments. Mortgage life insurance is something most people get when they buy a house or soon after.
How much does mortgage protection insurance cost?
Mortgage protection insurance rates vary depending on the size of your mortgage and how much time is left on the loan.
When determining your monthly cost, insurance companies consider your:
- smoking status
- length of time and amount left on the mortgage loan term, and
- whether the mortgage life insurance covers two spouses.
Let’s take a look at possible monthly costs.
If you have $130,000 left on your mortgage, you may find a mortgage insurance policy with bare minimum coverage of $50 a month. Adding riders, such as the return of premiums and living benefits, can increase the average monthly cost of mortgage protection insurance payments to $150 or more on that same $130,000 amount.
Mortgage life insurance is typically sold by your mortgage lender, an insurance firm linked with your lender. The premiums can be rolled into your mortgage payments if you purchase it from your mortgage provider.
Mortgage Life Insurance vs. Term Life Insurance
There are other options than a mortgage life policy for covering a mortgage in the event of the policyholder's death.
Mortgage life insurance is a product that is made only to pay off your mortgage balance if something happens to you. This means you have no flexibility in the amount of coverage you receive. If your family's financial needs change over time, mortgage life insurance won't give you options. Any payout goes to the mortgage lender.
Term life insurance is an alternative to mortgage life insurance. Term insurance can give your family flexibility with how they use the life insurance payout.
With term life insurance, you can match your insurance coverage amount and policy length to your mortgage. You could also pick a coverage amount or length that factors in other financial responsibilities, such as your annual income or children's college tuition.
The death benefit from a term life insurance policy can be used for anything - there are no strings attached.
So, which type of life insurance is right for you? It depends on your unique circumstances. If you're looking for a product that will pay off your mortgage balance, mortgage life insurance is a good option. If you want more flexibility in how your family uses the death benefit, term life insurance may be a better fit.
It is important to understand how mortgage life insurance differs from other types of life insurance before making a purchase.
Mortgage life insurance is one way to ensure that your loved ones won't be obligated to make payments if something happens to you. However, there may be better choices if you want to give your family greater discretion over how they spend the death benefit.
Dundas Life would be happy to provide you with more information on mortgage protection insurance and other life insurance products. We have a team of experts who can help you find the best solution for your needs. Contact us today for more information.