May 10, 2019 12:00 PM PT

Mortgage Life Insurance

Read more about Life Insurance

A mortgage is a long-term commitment. But what happens if you die before it's paid off? Mortgage life insurance can help. Read on to learn more.

Like many people, you may be several years into paying off a 30-year mortgage. But, with all the excitement, planning, and work that goes into buying a home, have you ever wondered:

What happens to my investment when I die?
Your mortgage doesn't die with you. Someone has to continue paying it or risk losing the home. But you can protect your investment with mortgage life insurance.

This type of insurance is worth considering, whether you have one residence, a second home, or other residential properties. We review the benefits in our guide.

What Is Mortgage Life Insurance?

Mortgage life insurance is a type of policy that pays off the remainder of your mortgage if you die. It is also known as mortgage protection insurance.

It relieves surviving family members from having to take on the financial burden of paying the mortgage—or losing the home to the lending institution.

Mortgage life insurance differs from traditional life insurance in the way it pays out:

  • Mortgage life insurance repays the mortgage only if the mortgage is still in existence at the time of death.

  • Life insurance pays out death benefits when the insured dies.

Mortgage Life Insurance Pros and Cons

  • The acceptance guidelines are minimal, usually with no medical exam required.
  • Most policies also pay off the mortgage if the homeowner becomes critically or terminally ill, or disabled and unable to work.
  • You leave your loved ones with a mortgage-free home.
  • The payout can only be used to pay off the mortgage.
  • The policy's proceeds usually go directly to the mortgage lender, not your dependents.
  • Even though your mortgage loan balance and death benefits drop, your premium payments remain the same during the life of the policy.

Why Do I Need Mortgage Life Insurance?

Right now, the financial institution that holds the mortgage to your home becomes the owner if you die.

It can then foreclose on the property unless:

  • Your surviving spouse or family members pay the financial institution what is left on the loan.

  • You have mortgage life insurance.

The lender may work with surviving family members living in the home. But there is no guarantee your loved ones can afford the payments or take out a new home loan.

Mortgage life insurance is ideal for:

  • Primary income providers and the main ones paying the mortgage.

  • Those denied a life insurance policy due to health or medical issues.

  • Anyone with uncertain job security. Example: Workers in high-risk occupations, such as roofers, who can't get disability.

Is Mortgage Life the Same as Private Mortgage Insurance?

Short answer: No, they are completely different.

Mortgage Life Insurance
Protects you by repaying the mortgage if you die, become disabled, or have a terminal illness.

Private Mortgage Insurance
Protects the lender in case you default on the loan, even though you pay for the coverage.

Private mortgage insurance pays out to the financial institution, not you, your surviving spouse, or family members.

Pay close attention to how the policy pays out when shopping for mortgage life insurance.

Does it go to the lender or to your family so they can continue to make payments or pay the mortgage off completely?

Types of Mortgage Life Insurance

Mortgage life insurance is available in three different types. To decide which type is best for you, consider:

  • The type of mortgage you have.

  • How much coverage you need to pay off the mortgage.

  • Whether you want the payment to go to the lender or to a family member.

Level Term Mortgage Life Insurance
With this type, the benefit amount doesn't change. Even as your mortgage balance decreases because you make payments, the benefit remains fixed.

Because the benefit is a fixed amount, this type of mortgage life insurance is more expensive than other types.

This type of mortgage life insurance appeals to first-time homebuyers or others with an interest-only mortgage.

Usually, the policy benefit is the same amount as your mortgage debt. Likewise, the term of the policy matches the number of years of your loan.

With level term mortgage life insurance, your beneficiaries receive the policy's benefit if you become critically ill, disabled, or die. Because it's a fixed amount, the benefit may provide additional funds to your loved ones after they pay off the mortgage in full.

Here's an Example:

Harry buys a 30-year level term mortgage life insurance policy with a $375,000 death benefit to cover his $375,000 mortgage. His monthly premium amount is $35.41.

If Harry dies before the term is up, his beneficiaries would receive $375,000, regardless of how much is left to pay on his mortgage. They can use any remaining funds to pay his funeral and burial expenses or other debts.

  • The benefit amount can be put toward another mortgage loan if you plan on buying additional property.
  • Covers gaps if you are underinsured.
  • Protects your investment if you become disabled, lose your job, or unable to work due to an illness.
  • Benefit is paid out to the beneficiary, not the mortgage lender.
  • Higher premium amount than other options.
  • Mortgage balance declines, but the premium amount remains the same.

What Can I Expect to Pay for Level Term Mortgage Life Insurance?
You could pay $430 a year for a $375,000 mortgage for a 30-year term.

Decreasing Term Mortgage Life Insurance
With this policy type, the amount of coverage you buy decreases as the outstanding balance of your mortgage decreases. When they both reach zero, the policy ends.

Although your coverage benefit and mortgage balance decrease, your premium amount remains the same throughout the term of the policy.

Typically, the policy terms are 15 or 30 years. Coverage amounts start at $50,000. You choose the coverage amount based on the balance of your mortgage. Make sure the policy decreases at the same rate as the interest rate of your mortgage. That way, it will cover the total amount of your mortgage debt.

Here's an Example:

Gene buys a 15-year decreasing term mortgage life insurance policy to cover his $200,000 mortgage. His monthly premium amount is $25.

Gene dies in an accident at age 40. At the time, he had $100,000 left on his mortgage. The mortgage lender receives the $100,000 to pay off the remainder of the mortgage.

  • Premiums are typically lower than level term mortgage life insurance.
  • Matches your mortgage debt as it decreases.
  • Once your mortgage balance is paid off, the policy ends.
  • The mortgage lender is usually the beneficiary.
  • Your premium amount remains the same even though the benefit value of your policy decreases.
  • Beneficiaries receive no additional benefits to cover house bills, maintenance, and other expenses to run the house.

What Can I Expect to Pay for Decreasing Term Mortgage Life Insurance?
You might pay $300 a year for a $200,000 mortgage for a 15-year term.

Universal Mortgage Life Insurance
This is a more flexible type of policy in the way it is structured. It starts out as a term policy, but you can convert it to permanent life insurance once your mortgage is paid off.

Rather than match the term and amount of your mortgage, you set a coverage amount that is more than your mortgage. You also select a shorter term than your mortgage. For example, for a 30-year mortgage, you might select a 20-year term.

The annual premium amount remains the same for the term of the policy.

As you pay your premium amount, your mortgage coverage amount declines, while your death benefit amount remains the same during the 20-year term. After the term ends, you convert the policy to permanent life insurance.

The death benefit amount pays your remaining mortgage for the next 10 years.

When your mortgage is paid after 30 years, you still have a significant death benefit left. However, you paid about 22% less in annual premiums than you would for a 30-year level term mortgage life insurance.

Here's an Example:

Vanessa has a $375,000 mortgage, so she purchases a universal mortgage life policy for $500,000. She selects a 20-year term, with a monthly premium amount of $27.50.

When the 20-year term ends, her mortgage amount is $177,000, while her death benefit remains at $500,000. She then converts to a permanent life insurance policy.

When her mortgage is paid off in year 30, her death benefit is $54,100.

  • Once the term ends, you can convert the policy to permanent insurance.
  • Better value for the amount of coverage provided.
  • Affordable permanent insurance that provides a death benefit once the mortgage is paid.
    • Interest rates may cut into remaining death benefits.
    • May need a higher death benefit than what remains in the policy.

What Can I Expect to Pay for Universal Mortgage Life Insurance?
You can pay $330 a year for a $500,000 death benefit for a 20-year term.

Can I Use A Life Insurance Policy To Pay My Mortgage When I Die?

Several types of life insurance policies can be used for mortgage protection insurance. Since these are life insurance policies, a medical exam is usually required.

Term Life Insurance
Term life insurance provides death benefits for a set amount of time. This time period, or term, ranges from 10 to 30 years. When the term ends, so do your benefits.

You can renew for another term, but the premium amount goes up the older you get. For example, the premium amount you paid when you took your policy out at age 26 for 30 years will cost significantly more at age 56.

Essentially, you are using the term life insurance policy for two purposes:

  • To provide death benefits.

  • To cover the remaining payments of your mortgage if you die before it is paid off.

You choose a coverage amount that covers both the amount of your mortgage and your funeral and burial expenses.

The value of the policy and the premium amount remain the same throughout the term period.

What Can I Expect to Pay for Term Life Insurance?
You'll pay $249.35 a year for a 30-year term, $250,000 policy at age 30.

Permanent Life Insurance
Permanent life insurance, such as whole life and universal life, doesn't expire like term insurance. It costs more than term, but it has a savings component that can be beneficial for paying off your mortgage.

As you pay your premium, the policy builds equity, or cash value. You can take this cash value and use it in a number of ways:

  • Put it toward your premium amount.
  • Invest it back into your policy.
  • Borrow against the funds.
  • Withdraw the funds and pay down your mortgage.
  • Withdraw the funds and invest them as you see fit.

Keep in mind that the cash value amount you use may lower your death benefits. However, they will build up again over time as you continue to pay your premium.

Whole vs Universial Price for $250,000 Policy

Whole Life:$2,550/yr.
Universal Life:$1,126.90/yr.

No Exam Life Insurance Policy
This type of life insurance policy has both term life and whole life plans. As the name implies, no medical exam is required to get coverage. However, you do have to answer some health-related questions.

This type of policy is beneficial for homeowners whose medical issues would disqualify them for traditional life insurance.

However, expect to pay more for this type of life insurance policy since the insurance company views you as a high risk.

Term vs Whole Price for $250,000 Policy

Term Life:$309.00/yr.
Whole Life:$3,036.60/yr.

You can also buy mortgage unemployment insurance plans and mortgage disability insurance policies. These are designed to temporarily pay your mortgage if you are unable to do so due to unemployment or a disability. While they can complement a mortgage life insurance policy, they should not take its place.

Can I Buy Multiple Policies?

You can buy a life insurance policy with a death benefit amount that will cover your mortgage amount. Some people even buy two life insurance policies: one for death benefits and one for their mortgage.

If you go this route, it's important to do a cost comparison of one single life insurance policy versus two separate policies. Often, it's cheaper to get two separate policies, knowing one will end when your mortgage is paid off.

On the other hand, you may be fine with the extra coverage in a single policy. When your mortgage is paid off, you have more of a death benefit to leave to your beneficiaries.

To illustrate, let's take a look at Dave's three options. He is 30 years old and just purchased a $350,000 home with a 30-year mortgage loan.

  1. One Permanent
    Dave can buy a universal life insurance policy with a $1,000,000 benefit to cover his mortgage loan. This will ensure his wife and children are financially comfortable when he's gone. His premium amount would be $332.50 a month for the rest of his life.

  2. One Permanent, One Term
    Dave can buy both:
    • A $500,000 universal life insurance policy that doesn't factor in the mortgage loan.

    • A 30-year, $350,000 term life insurance policy that covers the mortgage loan.

    In this scenario, he would pay $171.95 a month for the permanent policy and $26.99 a month for the term policy. That's a total of $198.94—$133.56 less a month than Option #1.

    Plus, when Dave turns 60, his mortgage is paid off and his term life policy ends. This leaves him with just the $171.95 a month to pay for the rest of his life for his $500,000 universal life policy.

  3. Two Seperate Term Policies
    Dave can buy two term life policies:
    • A 30-year term with a $350,000 death benefit to match his mortgage loan at $26.99 a month.

    • A 30-year term with a $500,000 death benefit at $34.47 a month.

    That's a total of $61.46 a month, significantly less than Options 1 and 2.

    However, when the $500,000 policy term ends, Dave will be 60 years old. Because of his age, he can only get a 20-year term policy with the $500, 000 coverage he wants to ensure his family's financial security.

    The cost would be $274.31 a month, or $102.36 more than Option 2 at age 60.

How Much Mortgage Life Insurance Coverage Do I Need?

How much mortgage life insurance you should get all depends on your situation. Ask yourself these questions:

  • Do I only want coverage for mortgage protection or do I want funeral and burial expenses, too?

  • Do I already have a life insurance policy? If so, is its death benefit enough to pay off my mortgage and my funeral and burial expenses?

  • Do I have savings, investments, or other funding means to cover some of my mortgage if I die before it's paid?

  • How much can I afford to put toward mortgage life insurance?

  • How much do I have left to pay on my mortgage?

If you already have a life insurance policy, you might first look into increasing the policy value to cover your mortgage amount. You can then decrease it once your mortgage is paid off.

While it may make sense to buy a policy in the amount that matches your mortgage amount, be aware that you could end up paying for more insurance than you need.

Remember, your mortgage amount will go down as you make payments. So, there's that fine line between overinsuring and having enough to cover your remaining mortgage at any point in time.

Consider talking to an insurance agent or a financial adviser. It's important to review your options and your financial situation before deciding on the best insurance option for your situation.

Where Do I Buy Mortgage Life Insurance?

There are several purchasing options for mortgage life insurance.

  • The Institution Handling Your Mortgage
  • Life Insurance Companies
  • Insurance Agents
  • Online Insurance Providers

Be sure to get comparison quotes from several different life insurance companies. Premiums vary among companies. Some may have lower rates because they have less stringent risk guidelines than others.

Mortgage life insurance through a financial institution is usually issued by a third-party insurance company that the lender is affiliated with. Your policy options may be limited and the cost may not be as competitive as getting it on your own.

Not all life insurance companies offer mortgage life insurance. So, you might need to do some shopping around.

An independent insurance agent versus an agent who works for one specific life insurance company is often the best route to take. Independent agents have access to products from numerous insurance companies. They can get you quotes on different mortgage life insurance plans so you can easily compare them side by side.

Buying mortgage life insurance online is also a good option. You can find what you need, get instant quotes, and apply for a policy all within a few minutes with minimal effort.

Bottom Line

If you own a home, mortgage life insurance is essential for protecting your investment. It ensures the mortgage on your home is paid off completely if you die, so your loved ones are not burdened with the debt.

Mortgage life insurance comes in various forms. You also have the option of using a traditional whole life or term life insurance policy to cover your mortgage amount and your funeral and burial expenses.

When deciding on which type of mortgage life insurance to buy, consider your current financial situation and choose a policy that best meets your needs now and into the future.

Write to Maryellen Cicione at Follow us on Twitter and Facebook for our latest posts.

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