A mortgage is a long-standing commitment, and it doesn’t die with you. If you pass on before it is paid off, someone has to take up the responsibility of paying up the loan or risk losing the house. And that is when life insurance policy to cover your mortgage comes into play.
Mortgage protection life insurance, also referred to as mortgage protection insurance refers to a type of policy which pays off your remaining mortgage in case of your demise.
A mortgage life policy relieves the surviving members of your family from losing the house to the lending institution or taking on the financial responsibility of paying the remainder of the mortgage.
However, mortgage protection insurance is different from traditional life insurance, mostly in the way it pays up.
This life insurance will always repay the loan only if a mortgage still exists at the time of passing, while life insurance pays up death benefits only when the insured person dies. This kind of insurance policy is worth considering, regardless of whether you have one home, a second residence, or multiple residential properties. We are going to review the benefits of life insurance later in this post.
How Does Mortgage Life Insurance Work?
Mortgage protection insurance policy is generally a term life insurance whose sole purpose is to pay off the balance of your loan in the event of your demise. This life insurance is tied to your mortgage almost in every way. Once you take your mortgage, whether on refinance or a purchase, the death benefit on your insurance policy is typically set up to match your mortgage loan amount.
However, your death benefit will then decline as you pay down the mortgage. When you pay off the entire mortgage, your life insurance will instantly go away. In case of your demise, the proceeds of your policy will automatically go to your lending institution to pay off the remainder of the mortgage on your home.
When it comes to the specifics, you will find variations depending on the insurance firm you use and the details of your situation. It’s also vital to note that while a lending institution might recommend that you need a life insurance policy for your mortgage, you don’t have to get it because it’s strictly an optional coverage.
Pros and Cons of Mortgage Life Insurance
Pros
• You don’t need any medical exams to get this life insurance policy because the acceptance regulations are minimal.
• You will leave your surviving spouse or family members with a mortgage-free property.
• Most of the policies pay off the loan if the owner of the home is unable to work, is terminally ill or becomes disabled.
Cons
• Even though your death benefits and the loan balance on your mortgage reduces, your premium payments will remain the same throughout the term of the policy.
• The proceeds of the policy normally go directly to the financing institution, and not your beneficiaries.
• The payout is only used to pay off the home loan.
Difference Between Life and Private Mortgage Insurance
It is important to note that private mortgage insurance (PMI) is not the same as a mortgage insurance policy. PMI refers to an insurance policy that lowers the risk exposure of a lender and is usually included on loans that are more than 80% of your home value.
This type of insurance is taken to induce the lending institution to make a loan which will be believed to be high risk because you’ll have less than 20 percent equity in the home. The insurance pays off upon your demise, but only when you default on the loan, which means PMI is a requirement of the lender.
In a nutshell, a mortgage life insurance policy protects you by paying the mortgage if you become disabled, gets a terminal illness, or if you die. On the other hand, a private insurance policy protects the lending institution if you default on your mortgage, even though you have paid for the coverage. It pays the financial lender, not you, your surviving spouse, or any other family members.
Why Do You Require Mortgage Protection Insurance?
The lender that holds your home’s mortgage automatically becomes the owner of your home once you die. Therefore, it can easily foreclose on your property unless you’ve got a mortgage life insurance or your surviving spouse or other family members pays the lender what’s left on the mortgage.
The financial institution might work with any surviving members of the family living in the property. However, there’s no guarantee your family members can take out a new loan, or afford the mortgage payments.
Mortgage protection insurance policy is ideal for:
• People denied a life insurance policy because of medical or health complications.
• Primary income providers and the main ones who are paying out the loan as well.
• Anybody with unreliable job security.
Types of Policies Available
Mortgage insurance policies come in three different categories level term, decreasing term and universal mortgage protection insurance.
To decide the best fit for you, consider the following:
• The kind of mortgage you have
• The amount of coverage you require to pay off your mortgage
• Whether you would like the payment to go to the family members or lending institution.
Level Term
With this type of life insurance policy, the benefit amount does not change at all. Even as your loan balance decreases since you still make your payments, the benefit remains constant. Because the benefit amount is fixed, this kind of mortgage insurance is usually more costly than other types. Level term mortgage insurance easily appeals to home buyers with an interest-only home loan or first-time homebuyers.
Generally, the benefit of this policy is the same amount as the debt of your mortgage. In the same way, the policy term matches the duration of your mortgage. With level term insurance, all your beneficiaries get the benefit of the policy if you become disabled, critically ill, or dies. Since it is a fixed amount, the policy benefit might provide extra funds to your family after they pay the loan in full.
Decreasing Term
With this type of policy, the coverage amount you purchase decreases as your mortgage outstanding balance decreases. When they both get to zero, the policy comes to an end. Even though your mortgage balance and the benefit of your coverage decrease, the premium amount will remain the same during the term of your policy.
Since the terms of the policy are 15 years or 30 years and the amount of coverage starts at 50,000 dollars. You can select the amount of coverage depending on the balance of the mortgage. Ensure that the policy reduces at the same rate as your mortgage’s interest rate. That way, it’ll cover the entire amount of the debt on your mortgage.
Universal
This insurance policy is more flexible in the way it’s structured. It begins as a term policy, although you can easily convert it to permanent life insurance when your mortgage is fully paid off.
Instead of matching the amount and term of your mortgage, you can set a coverage amount that’s greater than your mortgage. Besides, you can also choose a shorter period than your mortgage. For instance, for a 30-year mortgage, you can decide to go for a 20-year term. In this case, the annual premium amount will remain the same for the duration of the insurance policy.
As you continue paying your premium amount, the amount of mortgage coverage will reduce, and the amount of your death benefit will remain the same throughout the 20 years. Once the duration comes to an end, you can convert your policy to permanent life insurance, and the death benefit amount will pay your mortgage balance for the next ten years.
Should You Get Mortgage Insurance?
While having any policy is much better than nothing, mortgage life insurance does not seem like a wonderful idea for many families who require life insurance coverage.
Typically, mortgage protection insurance needs you to pay a similar amount of money every month for a reducing benefit. Moreover, you’ve no control over how the payment of the policy is used or where it goes.
For many people, a conventional term life insurance is a better selection than mortgage protection insurance because of lower premiums, a potentially bigger payout, and the flexibility of utilizing your life insurance payment when and how you want.
Whether or not you should purchase a policy solely depends on your loan amount, the value of your home, your general health, and your family’s assets.
Conclusion
If you own residential properties or a home, mortgage protection insurance is vital when it comes to protecting your investments. It makes sure that the mortgage on your property is fully paid off in case you die, which means your family members will not be burdened with the mortgage debt.
Mortgage protection insurance comes in different forms, meaning that you also have the option of utilizing a term life or conventional whole life insurance policy to cover the amount of your mortgage as well as your burial and funeral expenses.
When deciding the type of mortgage life insurance policy to settle for, consider your present financial status and select a policy that best suits your needs presently and in the future as well.
Apart from all these factors, you should also consider the duration of your mortgage and the probability that, if the financial institution sells your mortgage or you rewrite your loan, you will also have to rewrite your mortgage insurance policy. The most important thing that you should remember is that you need to purchase adequate life insurance not only to pay off your home alone but to meet all your financial requirements, as well.
