When you purchase a new home, you might be wondering what type of financial protections you need to help ensure your family can stay in your home should something happen to you.
How does mortgage life insurance work?
Mortgage life insurance is a life insurance policy that pays the balance remaining on your mortgage if you die before your home is paid off. A mortgage life insurance policy is typically a decreasing term life policy, which means that the amount of the death benefit decreases as the term goes on, just as your mortgage balance decreases.
The policy's beneficiary is the home mortgage lender, so unlike with a traditional term or whole life insurance policy, your heirs won't receive any money — it will go directly to the holder of your mortgage.
Benefits of mortgage life insurance
Your heirs won’t have to worry about paying off your mortgage
Since mortgage life insurance goes directly to the lender, there's no risk that your family will lose their home because they can't pay off the mortgage after you die.
No medical exam
A mortgage life insurance policy doesn't require a medical exam, so it might be the only life insurance product someone in poor health can qualify for.
Disadvantages of mortgage life insurance
Your mortgage lender is the beneficiary
Mortgage life insurance is less flexible than term or whole life insurance. If your heirs need money for expenses other than the mortgage, they won't be protected by mortgage life insurance.
The payout decreases as you pay off your mortgage
A mortgage life insurance policy is a decreasing term life policy: The death benefit decreases as the term goes on, which means that the payout decreases as the balance on your mortgage decreases. Once you pay off your mortgage completely, there is no death benefit paid.
Mortgage life insurance costs more
Because mortgage life insurance generally doesn’t require a medical exam or health questions, you’re likely to pay more than for your coverage than you would for traditional term life insurance (particularly if you’re in good health). Plus, as time goes on, the death benefit decreases but your premium typically doesn’t — which means your premium dollars don’t go as far as time goes on.
Alternatives to mortgage life insurance
Term life insurance
Term life insurance covers you for a fixed length of time, and if you die during the specified term, your loved ones, who are often the beneficiaries, will receive a death benefit that they can use for any reason, including paying off a mortgage.
Whole life insurance
Whole life insurance covers you for your entire lifetime, and it includes benefits such as a cash value component that you can tap for liquidity while you’re alive, plus the potential to earn dividends that can help you grow the value of your policy1.
Provided you keep current with your premium payments, the death benefit from a term or whole life policy will be distributed to your beneficiaries after your death to use in any way they want.
Finding the right life insurance policy for your financial plan
Life insurance should be integrated into your larger financial plan to maximize its benefits. A financial advisor can help you evaluate what kind of life insurance is the best choice for your circumstances and how you can build a plan to support mortgage debt or other expenses after you die.
1Using cash values through policy loans, surrenders or cash withdrawals will reduce benefits and may affect other aspects of your plan.
Dividends are not guaranteed.