A mortgage life insurance policy is anÂ insurance policy designed specifically to repay mortgage debt in the event of the death of the borrower. These policies differ from traditional life insurance policies.Â With a traditional policy, the death benefit is paid out when the borrower dies.Â A mortgage life insurance policy, however, doesn’t pay unless the borrower dies while the mortgage itself is still in existence.
There are two basic types of mortgage life insurance: decreasing term insurance, where the size of the policy decreases with the outstanding balance of the mortgage until both reach zero; and level term insurance, where the size of the policy does not decrease. Level term insurance would be appropriate for a borrower with an interest-only mortgage.
Before buying mortgage life insurance, a potential policyholderÂ should carefully examine and analyze the terms, costs and benefits of the policy. Remember, there are two lifespans to consider â€“ the lifespan of the policy holderÂ and the lifespan of theÂ mortgage. It’s also important to investigate whether oneÂ could get the same level of coverageÂ for your family at lower costÂ â€“ and with fewer restrictionsÂ â€“ by buying term life insurance.
Don’t confuse mortgage life insurance with private mortgage insurance, a product that people who take out a mortgage for less than 80% of the value of their home are required to buy.
Mortgage life insurance providesÂ near-universal coverage with minimal underwriting. There is often no medical examination or blood sample required andÂ can be a valuable insurance policy option for any homeowner with serious preexisting medical conditions which, would prevent them from buying traditional life insurance.
Other advantages include:
A mortgage-free home in the event of death,Â illness or disability that prevents work.Â With a mortgage life insurance policy in place, heirsÂ wonâ€™t have to worry or wonder what might happen to the family home. If a policyholderÂ dies or become gravely ill andÂ unable to work, theÂ mortgage life insurance policy willÂ pay off the entire mortgageÂ loan.
A policyholder doesn’t need to die to take advantage of coverage. With some exceptions, most traditional life insurance policies will not pay out unless you die within your coverage period. Most mortgage life insurance policies, on the other hand, offer coverage which works if you become disabled or unable to work, which makes this type of insurance a bit more versatile than a traditional term or whole life policies.
Policyholder peace of mind.Â This coverage relieves a policyholder’s worries aboutÂ family having a place to live if you die or cannot work. With theÂ mortgage paid off, theÂ family will always have a place to live, provided they can afford the property taxes and insurance each year.