Owning a home means having a little piece of the world that is completely your own – where you’ll have countless get-togethers, adopt a pet and raise your family.
It is also a cornerstone of your family’s financial future because it’s a substantial asset that’s likely to grow in value. But even the best-made plans are not certain, so homeowners need a way to protect their mortgage from falling to their partner or a co-signer if they were no longer around.
The second I closed on my home, I received a letter in the mail every day warning me that I needed to buy mortgage life insurance. As someone who works in the life insurance industry, even I had moments of doubt that I was throwing away an important piece of mail. (Also, any letter featured red, all caps text unnerves me.)
Mortgage life insurance, sometimes called mortgage protection insurance, is very different from term life insurance, so it’s important you understand what kind of coverage is being offered to you and what you actually need. Here, we’ll help you understand the difference between these two types of coverage and, most importantly, how you can keep one of your most costly assets from becoming a financial burden.
Keep your home from becoming a significant liability
Until it’s paid off, there’s plenty of financial risks built into your mortgage. If you can’t make the monthly mortgage payments, for example, your bank could sell your property to cover its losses. That’s why many homeowners enter a mortgage with someone else – like a spouse, partner or parent. Often, this person is helping limit the financial risk of buying a home.
But, what happens if you were to pass away unexpectedly? Your co-signer could end up facing that financial responsibility alone. If that happened, it could undermine the stability you have worked so hard to provide. There are significant differences between term life insurance and mortgage life insurance policies, and it’s important to know what you’re getting before buying any type of coverage.
What is mortgage life insurance?
Mortgage life insurance is simply life insurance that pays off your mortgage balance if you die. The mortgage life insurance policy is usually purchased when you buy your home, or soon after that, and lasts for the same number of years as your mortgage. Mortgage life insurance is a type of term life insurance. It’s usually sold by insurance agencies affiliated with mortgage lenders and by independent insurance companies that obtain information about your mortgage from public records, which is why you receive so many offers when you buy a home.
Keep in mind that terms and conditions vary for mortgage life insurance, but in most cases, if you were to die during the policy term, the lender would receive the payout, and the death benefit is exactly the amount you owe. As you make mortgage payments over time and your mortgage balance goes down, the death benefit amount on the mortgage life insurance policy goes down with it. Some insurers do offer a level death benefit, meaning the life insurance payout that is the same whenever the insured person dies. You’ll want to find out whether the death benefit of a mortgage life insurance policy decreases as the mortgage is paid off, as most policies do, before you consider buying one.
Don’t confuse mortgage life insurance with private mortgage insurance (PMI), which you may need to pay for along with your mortgage if you put down less than 20 percent on your home. Here are the advantages and disadvantages of mortgage life insurance:
Advantages of mortgage life insurance
One of the convenient things about mortgage life insurance is that it’s easy to get. Anyone can buy a policy and typically no medical exam is required in the underwriting process. This is especially helpful for someone with a pre-existing condition or an illness that either disqualifies them from other types of life insurance or pushes their life insurance rates up to an unaffordable level.
If the policy is affordable, mortgage life insurance also might be a good way to supplement your other life insurance coverage. If you have a policy in place to pay off your mortgage balance, your loved ones can then use the payout from your other life insurance policy toward other expenses.
To recap, mortgage life insurance pros:
- No medical exam required
- Most people can qualify
Disadvantages of mortgage life insurance
For many buyers, the mortgage life insurance payout amount declines over time. If you’re wondering whether you still have to pay the same premium every month for a smaller face value, yes, you do if it has level premiums. That means the amount you pay every month does not change even if the value of the policy goes down.
Another downside is that because mortgage life insurance is a simplified issue life insurance – you don’t have to undergo a medical exam and the underwriting process is less precise – the price will usually be higher compared to a comparable term life insurance policy that is medically underwritten.
The death benefits of mortgage life insurance can differ from those in term life insurance policies. Some mortgage life insurance policies will only pay a death benefit if you die from an accident, similar to accidental death insurance. Term life insurance has fewer exclusions – usually suicide within the first two years or an illness that was intentionally not disclosed in the application process – than mortgage life insurance on whether a policy will pay out death benefits.
Finally, because the death benefit is paid directly to the mortgage lender, your loved ones don’t get a chance to use the death benefit in a way that is more important to them at that time. The payout can only be used to pay off the mortgage, which the lender typically receives.
To recap, mortgage life insurance cons:
- The policy amount cannot be personalized to fit your individual financial needs
- Coverage decreases as you pay toward your principal
- Timeframe of coverage can only be the length of your mortgage
- Death benefit (the policy payout) is paid directly to the lender
- Death benefit only coverage your mortgage balance
- Coverage is more expensive for individuals in good health
Term life insurance vs. mortgage life insurance
If you’ve recently closed on a new home, your mortgage company may be sending offers for mortgage life insurance policies to protect your loan. But a mortgage life insurance policy is not the same as term life insurance. While seemingly convenient to purchase, this type of insurance can leave your family underinsured if you don’t have supplemental term life insurance coverage.
A mortgage life policy would pay your lender the balance of your mortgage if you died before paying off the loan. It’s also a simplified issue life insurance policy, which means none of your health information is taken into consideration with your pricing.
Therefore, with mortgage life insurance, you could be paying more for less coverage because the pricing isn’t personalized to you. For example, according to State Farm, a 30-year, $250,000 mortgage life insurance policy would start at about $66 per month for a 35-year-old man. That same man in excellent health could buy a 30-year, $250,000 Haven Term policy issued by MassMutual, which would offer more financial protection for his family, starting at $30 per month. (Get your own personalized life insurance quote here.)
Additionally, mortgage life insurance policies aren’t as flexible as term life insurance policies. The coverage you can buy typically maxes out at the amount of your mortgage and the length of the loan. If you purchased a $250,000 house with a 30-year mortgage, that’s the maximum mortgage life insurance you can buy. And, mortgage life insurance may have more exclusions than term insurance about what types of deaths qualify for the payout, so it’s important to read the fine print.
Term life insurance coverage offers flexibility, personalization and additional financial protection that you can’t get from mortgage life insurance. You get to choose your coverage amount, and you get to decide who would receive your coverage if you died while the policy was in effect. Your beneficiary or beneficiaries could then decide how to spend the coverage to best protect your family, rather than having your coverage go to your mortgage lien holder.
|Term life insurance vs. mortgage life insurance|
|Feature||Term Life Insurance||Mortgage Life Insurance|
|Amount of coverage||Any amount||Usually your mortgage principal, which decreases as the loan is paid off|
|Length of coverage||Usually 10 to 30 years||Your mortgage length|
|Beneficiary||Your choice||Usually your mortgage lien holder|
|How death benefits are paid||Your death||Sometimes accidental death|
|Underwriting||Often requires a health screening||No medical exam required|
How to use term life insurance to protect your mortgage
When you buy term life insurance, you get to choose a coverage amount and term length that meet your family’s needs. If mortgage protection is your primary goal, choose a coverage amount that would pay off your mortgage and a term length that’s at least as long as the life of your home loan. For example, if you owe $250,000 on a 30-year mortgage, then a policy in that amount would likely fit your needs.
But for most families, there’s more financial protection needed than merely an amount that covers your mortgage. You should consider income replacement for both spouses, day-to-day bills, and the cost of childcare and your children’s education… to name a few of our many financial responsibilities.
Flexibility is one of the significant benefits of a term life insurance policy. You can purchase coverage that not only helps protect your family from needing to pay off a mortgage without you but can also help ease the financial burden of day-to-day life.
Not sure how much is needed for “day-to-day” life? No problem. A life insurance calculator can look at your income, family structure and debts to help you determine the right policy for your needs.
How much should term life insurance cost?
The younger and healthier you are, the more affordable your term life coverage will be.
For example, a 30-year-old man in excellent health can purchase a 30-year, $250,000 policy starting at $27 per month. Prices will vary based on your age, health, term length and policy amount, but, for the most part, it’s much more affordable than a mortgage life insurance policy is. And, that coverage will remain the same over the course of the 10, 15, 20 or 30 years you choose.
To find out how your term life policy would fit into your monthly budget, estimate your rate. It’s free, comes with no obligation and takes less than a minute.
Finding the right term life insurance coverage
It’s easier than ever to secure high quality and affordable term life insurance coverage. You can apply for a policy entirely online, and, if approved, start coverage today. Yes, you can even accomplish this from your couch in your pajamas.
Top quality term life insurance coverage is essential
You wouldn’t buy a new home without a home inspection, and you should also do a little digging before settling on a new policy. Life insurance company ratings help indicate the financial stability of the company who issues your policy. Companies with higher ratings are considered by the rating agency to be in a better financial position to pay out a claim if anything happened to you.
A policy is only as good as the paper it’s written on, so before buying one, check to make sure the ratings are up to your (hopefully high) standards.
(P.S. Our Haven Term policy is issued by MassMutual, which has earned A.M. Best’s top rating of A++*.)
Even the American dream needs some protection
Whether it’s a condo, a co-op or a place in the suburbs with a lawn to mow on Saturday mornings, your home is more than just four walls and a roof. Even if it’s a work in progress or a starter home that you plan to sell in a few years, protecting your investment is a must.
If you died way too soon, you wouldn’t want your family to struggle with the house payment and risk losing the stability and the financial benefits that your home offers.
Term life insurance offers a flexible, affordable way to protect your mortgage so your family home can stay right where it belongs. With your family.
*Ratings are as of April 2019, and are subject to change. MassMutual has also received other ratings from different rating agencies.