You’ve probably heard the term mortgage life insurance, or simply mortgage insurance, and like many people you probably use them interchangeably. In point of fact, they are actually two very different types of insurance.
Mortgage insurance more commonly refers to the coverage that is required by a mortgage lender in order to induce the lender to make you the loan. This type of coverage has nothing to do with life insurance. It actually insures a certain percentage of your mortgage loan so that the lender will be reimbursed for at least part of the principal in the event of your defaulting on the loan.
Mortgage life insurance is a policy that you take yourself for the benefit of your dependents. It will provide for the payoff of your mortgage in the event of your death. The mortgage lender will have no involvement in a mortgage life insurance policy whatsoever, apart from the obvious fact that the loan will be paid in full when you die.
And mortgage life insurance – not mortgage insurance – is the subject of this article.
There are different ways that you can provide for the payoff of your mortgage upon your death using life insurance.
Decreasing term life insurance
There are life insurance policies that are specifically tailored to pay off of your mortgage. Mortgage life insurance is generally based on a decreasing term life insurance policy.
With decreasing term life insurance, the term of the policy matches the remaining term of your mortgage. If it is a brand-new 30 year mortgage, the term of the insurance policy will also be for 30 years.
However, as your loan is gradually paid down, the life insurance policy death benefit will decrease with it. This will ensure that you have only as much life insurance in force as is needed to payoff the mortgage upon your death.
The premium for this type policy is generally fixed for the entire term. This will actually make the policy less expensive than it would be if the premium was based on the amount of life insurance in force. If for example you have a $200,000 mortgage, rather than charging you a premium based on $200,000 worth of life insurance, it will be based on something closer to the midpoint – or $100,000 – which will keep the premiums lower than they otherwise would be if they were based on the amount of the loan. This is especially important in the early years of the mortgage when the balance is especially high.
Using level term life insurance to payoff your mortgage
There is a second option for mortgage life insurance, which is simply to add an additional term policy. It can be a standard level term policy, which is generally less expensive than a decreasing term policy.
In addition, since the amount of the death benefit will remain fixed throughout the term of the policy, the death benefit your family will receive will be higher. If you have a $200,000 level term life insurance policy, and you die 10 years later with the balance of $140,000 still outstanding on the loan, the mortgage will be fully paid, and the remaining $60,000 will be paid directly to your beneficiaries.
Think of mortgage life insurance as a supplemental policy
While a mortgage life insurance policy can be good coverage to have, you should never think of it as satisfying your complete need for life insurance. Mortgage life insurance should be taken as a supplement to other policies that you have. While the mortgage life insurance policy will pay off your mortgage, your family will still need other funds in order to pay for funeral expenses, uncovered medical bills, non-housing debts, and a sufficient amount of money to allow them to resettle into something that looks like a normal life.
Take a mortgage insurance policy if you already have life insurance to cover general expenses associated with your death, or to supplement a life insurance policy through your employer. This can be an especially good purpose for a mortgage life insurance policy, because employer plans generally do not provide enough coverage to provide for many of your family’s needs upon your death. The mortgage life insurance policy will payoff the mortgage, and leave the rest of the insurance to cover more direct needs.
