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Using life insurance to help protect your mortgage

When you buy a house, you'll get mailers encouraging you to purchase mortgage life insurance. Here’s what you need to know.

Owning a home means having a little piece of the world that is completely your own — where you can have countless get-togethers, adopt a pet and raise your family.

Your home 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 are no longer around. This is why you need life insurance to protect your mortgage.

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 where I wondered if I was throwing away an important piece of mail. (But also, any envelope featuring 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 pros and cons of mortgage protection insurance, how mortgage life insurance works, how it differs from term life insurance and, most importantly, how you can keep one of your most costly assets from becoming a financial burden.

In this article:

Until it’s paid off, there’s plenty of financial risk built into your mortgage. If you can’t make the monthly 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 even a co-signing 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 of a mortgage alone. If that happened, it could undermine the stability you have worked so hard to provide. That’s why having some type of insurance coverage in place is so important — it helps provide a financial cushion to your beneficiaries if you were to die.

There are significant differences between a term life insurance policy and a mortgage life insurance policy, and you should understand what type of insurance coverage is a better fit for you before you buy a policy.

Key takeaway: Life insurance helps provide a financial cushion to your loved ones if you were to die

Why term life insurance is a better value than mortgage protection insurance

When you buy term life insurance, you get to choose a coverage amount and term length that meets the needs of your family. 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.

But for most families, there’s more financial protection needed than merely an amount that covers your mortgage payment. 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 traditional 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. Another key benefit? Affordability. Medically underwritten term life insurance is usually more affordable than mortgage protection insurance.

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.

Term life insurance vs mortgage protection insurance

Feature Mortgage protection life insurance Term life insurance
Amount of coverage offered Your mortgage principal, which decreases as the loan is paid off A coverage amount of your choosing
Length of coverage Your mortgage length 10, 15, 20 and 30-year term lengths are available
Affordability Usually is less cost-effective than other types of life insurance Medically underwritten term life insurance is one of the most affordable types of coverage
Beneficiary Usually your mortgage lender Whomever you choose
When death benefits are paid Sometimes only accidental death Few exclusions on what type of death is covered
Underwriting No medical exam required Often requires a health screening for affordable pricing
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How mortgage life insurance works

Mortgage life insurance (or mortgage protection insurance) is simply life insurance that pays off your outstanding mortgage balance if you die. The mortgage 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.

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 each monthly payment, your outstanding mortgage balance goes down, the death benefit amount on the mortgage life insurance policy goes down with it. Some insurance companies do offer a level death benefit, meaning the life insurance payout 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 (aka mortgage protection 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 offers affordable premiums, 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:

What our customers say about rates

Disadvantages of mortgage life insurance

1. Mortgage protection coverage decreases over time

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. 

2. Mortgage protection coverage is more expensive than medically underwritten term coverage

Mortgage protection insurance is usually a type of simplified issue life insurance coverage, which means you don’t have to undergo a medical exam and the underwriting process is less precise. Typically, the less an insurance company knows about you, the more risk they are taking on in insuring your life. Because of this added risk, mortgage life insurance is usually going to be more expensive than a medically underwritten term life insurance policy.

Let’s look at some pricing examples for term life insurance — assuming you have a 30-year mortgage. Editor’s note: we searched for pricing examples for mortgage protection insurance and were unable to find easily accessible quotes. Per an insure.com article: “The national average for a mortgage amount is $120,000, Albright says. Assuming that’s your mortgage, you would pay roughly $50 a month for a bare minimum policy.” Please keep in mind that with mortgage protection insurance, your coverage amount will decrease over time as you pay toward your mortgage balance.

Quotes for term life insurance

Age Gender Coverage amount Term length Health Monthly premiums
30 Female $300,000 30-year Excellent $24.63
30 Male $300,000 30-year Excellent $30.63
35 Female $200,000 30-year Excellent $21.31
35 Male $200,000 30-year Excellent $25.46
40 Female $100,000 30-year Excellent $16.48
40 Male $100,000 30-year Excellent $19.82
Term life insurance quotes from Haven Life Insurance Agency (Haven Life)
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3. Payment of the policy may depend on how a policyowner dies

Some mortgage life insurance policies will only pay a death benefit if you die from an accident, similar to accidental death insurance. Regular 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.

4. A mortgage protection payout is paid directly to the lender

A mortgage protection life insurance payout (called a death benefit) is usually paid directly to the mortgage lender. Therefore, the proceeds of a policy cannot be used as your family chooses. Generally with a life insurance policy, you have coverage in place so that your loved ones will have a financial safety net that can be used however they need or wish — everyday expenses, childcare, a funeral and, yes, mortgage payments. With mortgage protection insurance, your family usually has no choice of how the funds are used as the money will go directly to the lender to pay the mortgage balance.

To recap, mortgage life insurance cons:

Key takeaway: For most younger, healthier individuals, mortgage protection insurance is going to be more expensive than a medically underwritten term life insurance policy

Is mortgage protection insurance worth it?

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.

For most people, mortgage insurance protection isn’t worth it because you can get more value from term life insurance. A term life policy offers more flexibility, personalization and financial protection than mortgage life insurance. With term 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 choose how to spend the coverage to best protect your family, rather than having your coverage go to your mortgage lien holder.

 

Life insurance is more affordable than you think

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About Brittney Burgett

Brittney Burgett is the marketing and communications director at Haven Life, a customer-centric life insurance agency backed and wholly owned by MassMutual. She joined the startup more than five years ago as one of the first ten employees and oversees external communications, content, SEO and various other growth marketing initiatives. Brittney is a passionate leader who believes that managing your financial life doesn't need to be intimidating or complicated and brings that philosophy to all the editorial and brand work at Haven Life. Prior to her role at Haven Life, Brittney worked in public relations, her client list included brands in the tech, food and nutrition spaces.

Read more by Brittney Burgett

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus.html

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