Mortgage Life Insurance: What Is It? Who Needs It?

As soon as you close on your new home and the deed is in your name, expect to find a whole lot of marketing materials in your mailbox. Some of these items will be from insurers.

You might get offers for mortgage life insurance (a.k.a mortgage protection insurance) and wonder if it’s worth looking into.

Mortgage life insurance is designed to repay your mortgage if you die during the loan term. So, if you should die before paying off your mortgage in full, this insurance pays off the balance so your loved ones won’t have to. But do you need this policy? Let’s take a look at what it is, and who really needs it.

What Is Mortgage Protection Insurance?

Mortgage protection life insurance assures a homeowner that other people will not have to step up and deal with the mortgage if the borrower dies unexpectedly, or becomes unable to work. If something like that should happen, the policy pays off the mortgage debt.

So, a policy of this type makes sure that a home buyer (and the lender) have arranged for the home’s mortgage to be faithfully repaid — even when the borrower is no longer in the picture. The borrower’s survivors will still need to handle the property taxes and homeowner’s policy — but the mortgage will be taken care of.

Mortgage protection insurance is sometimes called MPI. Don’t mix it up with private mortgage insurance — PMI. Home buyers have to pay premiums for PMI if their mortgage doesn’t cover at least 20% of the home’s price. PMI protects the lender from possible default.

The insurer charges regular premiums to keep mortgage protection insurance in place. And the borrower sends these payments to the mortgage company.

Most such policies cover the whole balance left on the mortgage, as long as the loan exists.

Does Mortgage Life Insurance Cover Real Needs? For Whom?

If you don’t plan to stay in your home for a span of years, or if you have no financial dependents, you likely do not need this insurance. Deed holders who enjoy relatively good health may be able to pick up regular life insurance at a better cost.

But a mortgage life insurance policy could make sense for some people with medical issues.  

Say you’re having eligibility problems and haven’t been able to buy a regular life insurance policy. Mortgage life insurance could fill in that gap.

Most any borrower should be eligible for mortgage life insurance. And it’s effective as soon as there’s a policy in place.

There is usually no medical exam involved, although the borrower does need to submit personal health history information.

The coverage that comes with a mortgage life insurance policy could also be attractive to someone who has an employment-based life insurance plan that could be lost due to likely job changes ahead.

Buying a home with a VA loan? The Department of Veterans Affairs has its own brand of coverage: Veterans’ Mortgage Life Insurance. With this type of policy, a borrower pays the premiums to the VA.

A mortgage life insurance policy could also make sense for deed holders with young kids. It could be good for a homeowner whose spouse earns too little to cover the mortgage bills alone.

Can’t a Life Insurance Policy Cover the Same Need?

Good point! Yes, you might be able to get the protection you need with regular life insurance. You can always call your current insurance broker, walk through some policy comparisons, and ask for personalized guidance.

In fact, with regular life insurance, the death benefit is more expansive. You could get a life insurance policy that’s worth at least as much as your mortgage. Some people buy life insurance worth ten times their annual salary.

If you should die during the term of the policy, the named beneficiaries would get the value of the life insurance policy. (Not the lender.)

The beneficiaries would be free to use that payout to handle any debt secured to the family home. But the beneficiaries named on a regular life insurance policy can also use the funds in other ways, as they see fit. General life insurance offers survivors that flexibility. Beneficiaries to a general life insurance policy may choose to:

• Replace income that’s lost when the policy holder dies.

• Handle probate and funeral costs.

• Pay off the mortgage — and other debt beyond the mortgage.

• Pay for home repairs or renovations.

• Help cover daily expenses or needs.

• Pay off credit card debt.

In contrast, a mortgage life insurance policy only pays out (to the lender) if you die during your term as a mortgage holder. When the mortgage is over, so is the mortgage life insurance policy.

On the other hand, the mortgage life insurance policy can help you if you become disabled and lose your source of earnings. So it has some degree of coverage that life insurance doesn’t address.

With either type of insurance, you must pay premiums. And either way, these policies can help your survivors pay off your mortgage.

What Happens When the Deed Holder Pays Off the Mortgage Balance?

What happens when the borrower pays off the mortgage depends on the type of life insurance policy in force. There are two main types:

• With the typical policy, the amount of coverage shrinks as the mortgage is paid down. Eventually, the balance goes down to zero and the policy ends.

• There is also a type of policy called level term. With this policy, there’s a set pay-out that doesn’t change. Be sure you know what you’re buying, and how the benefits work.

Speak with your insurance broker to learn about what’s available, and what’s best for you. Don’t forget to ask:

• Whether the available mortgage protection policy has other benefits and/or riders. Ask about the costs and benefits of these options.

• Whether the standard life insurance policies offer benefits and/or riders that matter to you and your household. Ask about the costs and benefits of these options, and compare the two types of policies.

Good to Know

When you buy a home, your lender might never mention mortgage life insurance. And most people don’t need it. Yet it’s good to know what options exist for protecting your deed, and giving your family confidence that the home won’t be foreclosed on if you’re not around.

If you’d like to know more, speak with the consultant you trust for your home and auto insurance. Ask probing questions. Insurance brokers have the knowledge you need. But they also like to sell policies — and not everything they offer will be necessary in your situation.