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- Mortgage protection insurance can cover your mortgage payments if you die.
- Mortgage life insurance isn't the same as mortgage insurance, which is required with smaller down payments.
- Term life insurance may be better than mortgage life insurance as it can cover mortgages and other expenses.
Mortgage life insurance, also known as, mortgage protection insurance, is marketed to homeowners as a way to pay off their mortgage in case of death. It shouldn't be confused with mortgage insurance, referred to as PMI or MIP.
Mortgage life insurance is a term life insurance product. Although it sounds good, it may be better to get a term life policy with a large death benefit that can cover your mortgage for your beneficiary.
What is mortgage life insurance?
Mortgage life insurance pays the remainder of your mortgage if you die during your term. "Mortgage protection insurance is a way to talk about insurance without mentioning dying," says Mark Williams, CEO of Brokers International.
Mortgage life insurance is a term life insurance product, meaning it will end after a specified timeframe — in this case, after your mortgage term ends. But unlike a traditional term life insurance policy that has the same premium, it's rates and the death benefit typically decrease as your mortgage decreases.
This insurance is often confused with private mortgage insurance, but they are very different concepts. If you have a mortgage and your down payment is less than the average 20%, your lender will require mortgage insurance to protect them in case you default on your mortgage payments.
How mortgage life insurance works
The beneficiary of a mortgage life insurance policy is usually the mortgage lender, but some policies allow you to select a beneficiary other than the mortgage company.
Williams said a person can name a spouse as the beneficiary on a mortgage protection insurance policy. The spouse will receive the money and can choose whether to pay off the mortgage or sell the house.
If a person has mortgage life insurance and a term life policy with the spouse as the beneficiary on both, then it can be a double windfall. However, the death benefit for the mortgage life insurance policy is equal to the amount remaining on the mortgage loan.
Types of mortgage life insurance
Decreasing term insurance
Decreasing term insurance is the more common type of mortgage life insurance. With this policy, your insurance premiums and coverages decrease as your mortgage amount decreases.
Level term insurance
Level term insurance provides a fixed death benefit through the duration of your mortgage. This type of mortgage life insurance would be suitable for a policyholder with an interest-only mortgage where the borrower only pays the interest for a certain period of time.
Benefits of mortgage life insurance
Securing mortgage life coverage can provide peace of mind that your family is protected. Mortgage life insurance also requires no medical exams or waiting periods.
Peace of mind for borrowers and families
If you pass away with an outstanding mortgage, mortgage life insurance pays the rest of the loan directly to the lender. In turn, your loved ones don't have to deal with the financial burden of paying off the mortgage alone and can focus on grieving your loss.
No medical exam
Unlike traditional life insurance, mortgage life insurance doesn't require a medical exam. If you have a mortgage and don't qualify for life insurance due to health issues, mortgage protection insurance is an alternative to protect your home.
You can find our guide on the best no exam life insurance here.
No waiting period
Most traditional life insurance policies enforce a waiting period. This period can lasts between four to six weeks while your insurer underwrites your policy. Mortgage life insurance provides coverage immediately, even if you were to die tomorrow.
Cost of mortgage life insurance
Your mortgage life insurance policy is based on your mortgage loan amount, so the details will vary depending on the cost of your home loan. Its rates decrease as your mortgage decreases, but premiums are typically more expensive than a traditional term life policy.
When selecting your death benefit amount for term life insurance, the rule of thumb is to select 10 times your annual income to cover the mortgage, education for dependents, and other costs if you die.
For example, if you make $75,000 per year, you would purchase a life insurance policy for $750,000. Generally, you'll probably want to get as much life insurance as you can comfortably afford each month. If it would be a struggle to make your premium payments, it's probably too much for you.
It's not uncommon for people to get a death benefit of $1 million in term life insurance. We looked at sample quotes from three different insurance providers for a $1 million term life insurance policy with a 20-year term for a non-smoker in good health:
Age | Nationwide | State Farm | Guardian Life |
25 year old female | $40.69/mo | $45.29/mo | $47/mo |
25 year old male | $52.94/mo | $45.29/mo | $58/mo |
35 year old female | $45.94/mo | $54.79/mo | $57/mo |
35 year old male | $54.69/mo | $55.69/mo | $65/mo |
45 year old female | $94.06/mo | $119.19/mo | $119/mo |
45 year old male | $125.56/mo | $122.69/mo | $159/mo |
Application process for mortgage protection insurance
Most borrowers obtain mortgage life insurance through their lender or an insurance company affiliated with the lender. Few independent insurance providers also sell this coverage, but it's rare. Speak to your lender or an insurance broker to understand your options and how to apply for mortgage life or mortgage protection insurance.
Comparing mortgage life insurance to other policies
Term life insurance
The two major differences between term life insurance and mortgage protection insurance are the death benefit and how premiums are calculated.
Mortgage life insurance premium rates and death benefits decrease as the mortgage decreases. However, with most term life insurance policies, the premium and death benefit remain the same during the policy's period. Also, most term life insurance policies require a medical exam, but most mortgage life policies don't.
So, if you have a mortgage and don't qualify for traditional life insurance due to health issues, mortgage protection insurance is an option. Like other types of no-medical–exam term life insurance policies, mortgage life insurance will be more expensive because there is no health exam to determine your insurance risk.
Your mortgage life insurance policy terminates when your mortgage is paid off. If you pay off your mortgage before you die, you'll be left without a death benefit—unless you have other life insurance.
Permanent life insurance
Unlike term life insurance, permanent life insurance offers lifelong coverage. It also comes with a cash value component, where a portion of your premiums is saved or invested, increasing your policy's value. However, because of its benefits, permanent life insurance is more expensive than term life.
The two most common permanent life insurance policies are whole life and universal life insurance. With a whole life policy, you pay a fixed premium for a guaranteed death benefit. The policy's cash value also grows at a fixed interest rate.
In contrast, a universal life policy allows you to adjust when and how much you pay in premiums, in turn adjusting your coverage. Universal life could be an option worth considering as you can lower your coverage and premiums as your mortgage decreases.
How to choose the right policy
The best life insurance policy for you depends on your budget and financial situation. It's wise to consult an accountant and financial advisor to determine which policy fits your financial needs and goals. It's worth taking the time to find the best policy for you, because once you've signed on the dotted line, it's a lot more difficult to make changes if you need to adjust your coverage.
Mortgage life insurance FAQs
Who should consider mortgage life insurance?
Mortgage life insurance may be a good option for homeowners with health conditions, as this coverage provides immediate coverage without the need for a medical exam. However, traditional life insurance may be the best option for most people as it can cover your mortgage and your other financial obligations. Plus, it tends to be cheaper.
How does the payout process work with mortgage life insurance?
Mortgage life insurance pays your remaining mortgage balance directly to your lender. However, you can also name other beneficiaries, such as your spouse or children, and they'll receive the death benefit.
What's the difference between decreasing term and level term mortgage life insurance?
With decreasing term insurance, your coverage decreases as your mortgage decreases. With level term insurance, your coverage amount stays the same throughout the term.
Is mortgage life insurance required by lenders?
No, lenders do not require mortgage life insurance. But it can be beneficial for homeowners wanting to financially protect their beneficiaries.
Can I get mortgage life insurance if I have a pre-existing health condition?
Yes. One perk of mortgage life insurance over a traditional term policy is that it typically doesn't require a medical exam. So, homeowners with pre-existing conditions generally qualify for this coverage, but it's important to check with the policy issuer to verify any exclusions or limitations.
Ronda Lee was formerly an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. Before joining Business Insider, she was a contributing writer at HuffPost with featured articles in politics, education, style, black voices, and entrepreneurship. She was also a freelance writer for PolicyGenius. She worked as an attorney practicing insurance defense and commercial litigation.
Personal Finance Reviews Fellow
Alani Asis is a Personal Finance Reviews Fellow who covers life, automotive, and homeowners insurance. Prior to Insider, Alani was a Mortgage Support Specialist and a personal finance freelance writer based in Hawai'i. You can reach her via email at aasis@businessinsider.com or through Twitter @AlaniAsis.
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