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Do You Need Mortgage Life Insurance?

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Do you have enough life insurance coverage?

If you passed away would your family have enough money to get by, or would they struggle financially? Would they be able to live in the same house and at the same standard of living, or would they need to downsize?

These are important questions to ask and why you should make sure you buy enough life insurance coverage. Life insurance policies exist to help provide money for these situations, and there is one particular life insurance policy called mortgage life insurance that is specifically designed to repay your mortgage in the event of your death, disability or some incapacitating disease. But what is it, and do you need it?

What is Mortgage Life Insurance?

Do you need mortgage life insurance?Like the name implies, mortgage life insurance, or mortgage protection insurance, is there to repay your mortgage in the event you die or are disabled and can no longer make payments. You will be offered mortgage life insurance when you fill out loan papers for your house and sign your mortgage. You can decline this insurance when it is offered, but if you choose to decline this insurance you will be required to sign several forms and waivers verifying your decision to decline the coverage.

Why do you have to sign waivers to decline mortgage life insurance coverage? Officially, to designate that you understand the risks associated with having a mortgage and the possibility of dying and not being able to pay it off. But mostly it is there to give you second thoughts and persuade you into buying it. In truth, mortgage life insurance benefits the lender more than it benefits the borrower.

Is mortgage life insurance worth the cost? As with everything, there are pros and cons. Let’s take a look and you can decide if you need mortgage life insurance or not.

Advantages of Mortgage Life Insurance

Mortgage life insurance gives your family peace of mind. In the event of a terminal illness or your untimely death, the mortgage life insurance policy covers your loan to the bank and your mortgage is repaid in full. The benefit is knowing that your house will be fully repaid and you will not have to worry about your family struggling to make mortgage payments.

Another advantage of mortgage life insurance is near universal coverage with minimal underwriting – there is often no medical examination or blood sample required at the inception of your policy. Thus it can be a valuable insurance policy option for the homeowner that has serious preexisting medical conditions that would preclude a normal life insurance policy.

Sounds good, right? So why doesn’t everyone choose to buy mortgage life insurance?

Disadvantages of Mortgage Life Insurance

Term Life is better than mortgage life insurance

In most cases, a term life policy is better than mortgage life insurance

In general there are four reasons why there are better options than mortgage life insurance: it is a decreasing benefit; it benefits the lender, not the borrower; you have no control over the policy payout; and it can be more expensive than a comparable term life insurance policy.

Mortgage life insurance is a decreasing benefit. Mortgage life insurance premiums are a fixed rate, but the payout is generally fixed to your mortgage principle*. So the value of the policy decreases as you repay your mortgage. Buying a standard term life insurance policy gives you a fixed premium and a fixed payout. You know exactly how much will be paid out in the event you or your loved one dies.

*Some newer mortgage protection or mortgage life insurance policies pay out at a fixed rate for the first few years, then decrease as time goes on, and some pay out at a fixed rate. Read the terms closely before making a purchase.

Mortgage life insurance policies benefit lenders more than the insured party. It is important to note that your family will not actually see any of this money from this insurance policy. The mortgage lender is the policy beneficiary and if you die the bank will receive the life insurance payout which will be used to repay the mortgage in full. The benefit for your family is a house paid in full.

You have no control over where the life insurance settlement goes. As mentioned in the above paragraph, the life insurance settlement is automatically sent to the bank to cover the terms of the mortgage. Not having a mortgage may give you peace of mind, but that may not actually be the best use of your funds at the time. A traditional term life insurance policy gives you better control over how to use your life insurance settlement. For example, if you have a lot of debt at a higher interest rate it may be more prudent to repay that debt before repaying your mortgage.

Mortgage life insurance is expensive for the amount of coverage. The premiums you pay at the beginning of your mortgage are probably in line with the amount of coverage you are receiving, but as time goes on you receive much less coverage for the money. You are more than likely better off going with a term life insurance policy and getting sufficient coverage to pay off your home in full if that is your goal. Be sure to get multiple life insurance quotes before purchasing your life insurance policy.

Should you buy mortgage life insurance?

Why most people should skip mortgage life insurance. Overall, mortgage life insurance doesn’t seem like a great idea for most people. You pay the same amount of money each month for a decreasing benefit and you have no control where the payout of the policy goes or how it is used. For most people, a traditional term life insurance policy is a better option than mortgage protection insurance due to a potentially larger payout, lower premiums, and the flexibility of using your life insurance settlement how and when you want.

Why some people should consider mortgage life insurance. That said, there are actually several reasons why people would want mortgage life insurance. The primary benefit of mortgage life insurance is coverage with minimal health screenings; you may not be required to submit to a medical examination before purchasing a mortgage protection policy. If you have trouble purchasing a term life insurance policy, then applying for a mortgage life insurance policy when you buy your house is a good idea.

Should you buy mortgage life insurance? That will depend upon the amount of your loan and the value of your house, your family’s assets and your general health. In addition to these factors you must consider the term of your loan and the possibility that if you rewrite your mortgage or the bank sells you loan, you’ll have to rewrite the mortgage insurance policy as well. The most important thing to remember is that you buy enough life insurance to meet all your financial needs.

Do Your Research Before Buying Mortgage Life Insurance

Be sure to read the fine print and fully understand both your life insurance policy and the mortgage life insurance policy being offered to you before you accept or decline it. Your loved ones will appreciate your thoughtfulness.


Published or updated January 6, 2014.
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{ 24 comments… read them below or add one }

1 ctreit

Great post! I suppose for most people it would make sense to calculate their overall life insurance coverage which would include mortgage debt. This is what we did and I am pretty comfortable with my wife’s and my own life insurance.

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2 mrsfeds

This information is very helpful . Thank you for showing me how to go about making very important decisions for my family and I. Most times people make uneducated decisions because they get confused on how to go about getting the right information.. Thanks Again

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3 Kristine

Thanks for the article! I definitely agree with your comment to buy enough life insurance to cover all of your financial needs! Sounds like it should be called mortgage “lender” insurance! :)

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4 Kirk Kinder

Good post. People get suckered into these policies without understanding them, especially the decreasing term portion.

More often than not, folks are better getting a term policy on the outside market so long as they are insurable. So I recommend getting a term policy. If you can’t, then get the mortgage life.

And, you have a great point that everyone should ensure they have enough life to cover all risks, not just the mortgage.

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5 Ryan

That about sums up my opinion, Kirk. I think most people are better off with a term life policy if they are insurable. It’s coverage that remains at the same level for the duration of the policy, not a decreasing benefit for a static payment.

When my wife and I chose our life insurance coverage, we looked at all possibilities, including mortgage, college tuition, living expenses, etc. Covering only one aspect of your financial life just doesn’t make sense.

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6 Dan

Great post! It seems like mortgage life insurance is not a good option for anyone who is insurable elsewhere. They now have someting called “return premium mortagage insurance”. They claim they’ll return all the premium paid if you keep the policy for the entire term, which can be between 20 & 30 years. Ryan, have you heard of this type of policy? If so, what’s your opinion on it? Thanks!

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7 Ryan

Hi Dan, that would be my assessment of mortgage life insurance as well- it has it’s place, but there are often better options for most people. Here are my thoughts on Return of Premium Term Life Insurance.

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8 Joanne

This is an interesting discussion to me because I am considering buying mortgage insurance protection on a second home. I would love to have some advice. Consider this: If a 60-ish couple with two grown children own one home free and clear and a second home that has a $300,000 mortage, does it make sense to get mortgage insurance on the second home? Is it true that such a policy would pay the outstanding mortgage no matter which of us might die? Thanks for any comments!

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9 Anita

What happens to your home equity if you die without mortgage life insurance? Does the bank get it all or can the proceeds from any term life insurance policy be used by your beneficiary to pay off the remainder of the loan even if they are not one of the homeowners? The equity in my home is more than the amount owed and I want to make sure it is protected.

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10 Ryan

Anita, if you can continue making your mortgage payments then nothing happens. This insurance is designed to protect individuals who would have a difficult time making mortgage payments if one member of the family were to pass away. In that instance, the mortgage would be paid off and you wouldn’t have to worry about the mortgage payments any longer. If you can no longer make the mortgage payments you would have to forfeit your house and the equity in your house to the lender, and yes you would lose all your equity. That said, in most cases, a standard term life insurance policy is a better option for most people and it is something I recommend everyone look into. Here is a helpful article: How Much Life Insurance Should You Buy?.

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11 K Yothers

Good article. Just what I was looking for. Good discussion of pros and cons of this type of insurance.

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12 mspaap

My uncle recently passed and Mortgage Life Insurance will pay off his home so his family doesn’t have to worry about making payments.

Although its true the family won’t see the money because it will be paid to the lender, the family has the option of living in, or selling the home for a profit.

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13 Terry

Since I am not married and have no kids, I have my sister’s name as my beneficiary. My life insurance here at work is more than enough to give her a great gift. Wouldn’t it be a great relief to her not to have to deal with having to sell my house to pay it off, if I had the mortgage life insurance?

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14 Ryan

Terry, I’m sure it would be nice for your sister, but if you want to have the house paid off if you die, you can probably get a less expensive term life insurance with a higher pay off amount and a lower premium. The added benefit of a term life insurance policy is that you get to lock in the low rates now, so if you sell your home or get married, you won’t have to worry about adding more life insurance. You don’t even need a large policy – enough to cover your estate should be sufficient.

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15 Garth

Why some people should consider mortgage life insurance. That said, there are actually several reasons why people would want mortgage life insurance. The primary benefit of mortgage life insurance is coverage with minimal health screenings; you may not be required to submit to a medical examination before purchasing a mortgage protection policy. If you have trouble purchasing a term life insurance policy, then applying for a mortgage life insurance policy when you buy your house is a good idea.

This is really bad advice. If you can’t qualify for a regular term insurance policy you could never answer the question they ask in order for you to qualify for insurance without a medical, and if you did it make the coverage “void” at the outset. There is simply no way on God’s green earth that you could ever qualify for mortgage insurance if you did not qualify for an individual insurance policy.

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16 Ryan Guina

Garth, “have trouble purchasing” is different than “cannot buy.” Some people are eligible for life insurance, but it is very expensive for them, or they may have to go through hoops to get a policy approved. As with everything, each situation is unique.

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17 Ric

“You have no control over where the life insurance settlement goes”. Does this mean in the event of death of the policy holder, the bank when presented with a certified death certificate, who holds the loan would process the paperwork to pay off the loan or does the surviving spouse initiate the process?

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18 Ryan Guina

Ric, I’m not 100% certain. I recommend reviewing the policy or calling the insurance company to determine how a payout is handled.

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19 Elaine

Hi- my husband has diabetics and numbers are too high to get life insurance so should we get mortgage cancellation on a new house? Also the house is only in my name. What options do I have?

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20 Ryan Guina

Elaine, this is a situation where mortgage life insurance may be worth it, however, I am not sure you can get mortgage life insurance in his name if he is not listed on the mortgage. Mortgage cancellation policies are generally only available when you first make the purchase, so if it has been awhile since you bought your home, you may not be able to get this insurance unless you refinance. If you decide to refinance, you may be able to add your husband’s name to the mortgage, and then get mortgage cancellation insurance on his name. My recommendation is to call around and ask questions about this. It sounds like you will need to do a little research to find the right solution. Best of luck.

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21 Renee Charron

Ryan,
My husband and I are trying to decide if we want to purchase Mortgage Life Insurance to pay off our marital house (his name is on the mortgage only, it was his before) only. I have another house (before him) that has a small mortgage left on it, (my name on mortgage only) and it is rented out with an income. We also have another house we bought after we were married, (my name only), that is paid off. We want to know if we should buy mortgage life insurance to pay off “his” house if he passes first. He has a job. I am a stay at home Step Mom, and his only daughter is in 9th grade. No other children. Trucks paid off. Money in bank (stocks/bonds/cash). We were looking at Mortgage life insurance to pay off the bigger mortgage only, as that would be my biggest bill. If we buy that, I assume the lender/mortgage gets paid off in full, and I would own the house to sell, etc.?? We are both 50 yrs old. Thank you!!

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22 Ryan Guina

Renee, from my understanding, mortgage life insurance needs to be purchased when you obtain your mortgage. However, there may be some companies that allow you to purchase a policy after the fact. You will need to check with your lender for availability. That said, your financial situation is unique. Because you and your husband own multiple properties, you may find it beneficial to meet with an insurance agent to go over all your insurance needs, including homeowner’s, liability, life insurance, etc. You may find that a standard term life insurance policy for each of you is a good option, as the payment would go directly to the beneficiary and can be used for any purpose, including paying off mortgages or other bills, paying for living expenses, or for retirement. A financial planner can also help you understand your needs. I hope this points you in the right direction.

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23 jm

my question is what do you do if you become disable and can not afford to make the mortgage payment is this not what mortgage insurance is for. yes I know it will help those who can not get life insurance and the person passes away ect. but what about disable life insurance does not help in this case. If your 60+ it gives one pause

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24 Ryan Guina

You would need to buy a separate disability insurance policy for this type of coverage. That wouldn’t specifically cover your mortgage, however. It would give you a monthly payment based on the level of coverage you had, which is often based on a percentage of income. You may wish to speak with an insurance agent if you have concerns about becoming disabled or losing your income.

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