Mortgage Life Insurance Guide

What is it? Find The Best Alternative & Compare Life Insurance

Your home is one of the most significant investments you’ll ever make. Many people use life insurance to protect against their mortgage in case something happens.

Below, you’re going to learn what mortgage life insurance is, how it works, and the best alternatives so you feel confident about knowing how to find the right life insurance policy for your family.

Use the instant quote tool on this page and compare rates of mortgage protection life insurance companies.

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What is Mortgage Life Insurance?
Types of Mortgage Protection Life Insurance
Pros & Cons of Mortgage Life Insurance
The Best Alternative to Mortgage Life Insurance
Compare Mortgage Life Insurance to Other Policies

Mortgage Life Insurance guide

What Is Mortgage Life Insurance?

Mortgage life insurance is a level or decreasing term life insurance policy designed specifically to repay a mortgage loan if the borrower dies.

These policies are a way to pay off the mortgage in the event of your death, disability, or life-altering disease. Your life insurance payout help your family stay in the home after you are gone by covering payments.

In the past, this policy was acquired through banks and mortgage lenders. Most mortgage protection nowadays is sold through independent insurance agencies.

How Mortgage Life Insurance Works

Mortgage insurance is similar to traditional life insurance in how it works.

  • You buy a policy and pay regular premiums.
  • The policy ends at the end of the policy term – usually 20 or 30 years.
  • If you die during the term of the policy, your beneficiaries receive a death benefit – usually the price of your home.

The payout often matches your mortgage balance. As your outstanding debt goes down, the unused amount of life insurance may be used to cover other financial needs at the time of your death. The amount of coverage never changes, and your monthly premiums remain the same.

How is Mortgage Life Insurance Different than Traditional Life Insurance?

house with mortgage protection insurance

Mortgage protection policies are different from traditional life insurance policies in one important way. In traditional life insurance policies, the death benefit is paid out when the borrower dies. However, in mortgage life insurance the death benefit is paid out when the borrower dies while the mortgage is still in existence.

The term length for traditional life insurance policies is usually flexible.

Americo Life Insurance Company is one company that offers mortgage protection insurance. You can choose term length in five or ten-year increments, and some insurance companies even allow custom term lengths. However, mortgage life insurance is generally locked in 15, 20, or 30 years.

Your age may also limit the term length.

Types Of Mortgage Protection Life Insurance

There are two basic types of mortgage life insurance, decreasing term and level term. Below you will learn how each works, and the differences between them.

Decreasing Term Insurance

The size of the policy decreases with the outstanding balance of the mortgage until it reaches zero.

For example, if you were to die in the fifth year of the policy term, your payout would be significantly higher than if you died on the 10th year. This is because you would owe more to your mortgage lender in year 5 than year 10.

If you are getting a decreasing term policy to cover your mortgage debt, make sure that the term of your plan covers the length of your mortgage (example 25 years).

These policies are rarely used anymore but do still exist.

Decreasing term policies are typically not recommended by life insurance experts because the premiums can go up while the death benefit goes down. This means your paying more money for less coverage.

Decreasing vs level term mortgage life insurance payout
Decreasing Term: Blue
Level Term: Red
These are not real death benefits, but will help you understand the primary difference between the policies.

Instead, people usually purchase level term life insurance.

Level Term Insurance

With a level term life insurance policy, the coverage amount and the premiums remain the same.

This means you will get the same payout whether you die in year 5 or year 25 of the mortgage. This is usually a better option since the premiums are the same, and the death benefit, which you’re more likely to need in years 20 to 30, does not decrease.

The level term life insurance expires based on the term length you purchase. This is more appropriate for most homeowners.

Carefully examine the terms, cost, and benefits of mortgage life insurance in relation to your lifespan expectation and the mortgage’s lifespan.

Pros & Cons Of Mortgage Life Insurance

You should examine the advantages and disadvantages of mortgage life insurance to decide if you need it, or not.

It may be an ideal solution for some families, but others might not need mortgage life insurance at all.

Advantages Of Mortgage Life Insurance

homes with mortgage life insurance policies

We have found four main advantages of mortgage life insurance below.

Convenience of Mortgage Life Insurance

The most significant advantage of mortgage life insurance is its convenience. It is best for people with a pre-existing condition because there is no medical exam required to buy this policy (for an accidental death policy). Accidental death mortgage life insurance may be an option if you’ve been denied whole life insurance or term life insurance because of a medical condition.

Mortgage Life Insurance as Supplemental Insurance

Mortgage life insurance can supplement your other individual life insurance policy. If you pass, your mortgage life policy can pay off your mortgage, and your term or whole life insurance policy can take care of your bills and other expenses.

Mortgage-Free after Death

Your family will have a mortgage-free home if you die, have a terminal illness, or simply cannot work due to illness or disability. Your mortgage life insurance policy will pay out upon your death and cover your mortgage expenses so your family won’t have to make payments on your home without your income.

Mortgage Life Insurance Pays with Disability

Most traditional life insurance policies will only pay if you die within your coverage period. With mortgage life insurance policies you don’t have to die to take advantage of this coverage. They offer coverage which works if you’re unable to work or become disabled. This coverage is more versatile than a traditional term or whole life insurance.

Cons Mortgage Protection Insurance

There are many advantages to mortgage life insurance, but there are also a few cons you should know about. Again, you can likely find a better policy than a traditional decreasing term mortgage life insurance.

Decreasing Payout

Many mortgage life insurance policies offer level premiums for the policy’s duration, but the coverage decreases with the term. The mortgage life insurance policy’s potential decrease every time you pay your mortgage.

Look for the newer type of mortgage life insurance with level death benefit where payout doesn’t decrease.

Mortgage Life Insurance is More Favorable to the Lender

There is a lack of flexibility with some mortgage life insurance policies. Often, it is more favorable to the lender than your family because the bank gets the payout if you die instead of your beneficiaries.

With regular term life insurance, the payout is given to the beneficiaries so they can use the money as they see fit. Look for mortgage life insurance that pays your loved ones directly.

Your Premium May Be Higher Than Term Insurance

Mortgage life insurance premium may be higher than regular term insurance. Mortgage life insurance is often used for people with unique medical conditions. If you are healthy, you will be approved within days, not months (like a traditional term life insurance policy). Because of this, premiums are usually higher.

Difficulty of Getting an Accurate Quote

It is sometimes difficult to get an accurate quote for mortgage life insurance protection online. There is less transparency in the mortgage life insurance market, and it can be confusing since the payout decreases over time.

Mortgage Life Insurance Is Tied To Your Mortgage

If you buy another home or you choose a different lender, you’ll have to take out a new policy. A term life insurance policy will be portable and continue to cover you whatever your lender is.

The Best Alternative To Mortgage Protection Life Insurance

The most popular alternative to mortgage life insurance is a traditional term life insurance.

This is because traditional term life insurance may provide a higher face amount coverage and lower premiums. You have the flexibility of using your life insurance payout any way you want to.

Here are several reasons to consider term life insurance instead of mortgage life insurance.

Term Life Insurance May Be Cheaper

Term life insurance costs less than mortgage life insurance policies when you acquire a home loan. It has a lower monthly cost for applicants in good health.

You’ll Get a Fixed Benefit Amount

Your beneficiaries will receive a fixed payout when your family files a claim. Mortgage life insurance payout decreases as you pay your mortgage (and the payout is paid directly to the lender).

Your Policy Can Cover Multiple Needs

You can get a policy enough to cover your mortgage and provide for your family. You can buy term life insurance policy large enough to pay your mortgage and provide a cash benefit to your family when you die. Choose a coverage amount that can replace your income and cover for your children’s college tuitions and other expenses.

Get An Immediate Decision

There are policies that will give you an immediate decision if you need $500,000 of coverage or less and can qualify for them.

Term Life Insurance Provides Your Family With Cash To Use However They Want

Your beneficiaries will receive cash in the event of your death. They can use the funds to pay off the mortgage and other expenses. It is the best way to provide your family with cash they can spend however they please.

Term Life Coverage Can Extend Past Your Mortgage Term

Mortgage life insurance policy coincides with the length of the home loan while term life insurance policies last between five to 30 years. Buyers can choose a term based on their longest-term financial obligation.

Buying a home is the best time to evaluate your life insurance needs. It is wise to look at your family’s financial situation before you decide how much and what type of insurance coverage you need.

Compare Mortgage Life Insurance to Other Policies

Your decision to buy a mortgage life insurance policy or a different policy will depend on the amount of your loan, the value of your house, and other financial factors.

You must consider your family’s assets and your general health. The most important thing to remember is to buy life insurance to meet all your financial requirements not just pay off your home.

Things to consider when deciding whether to buy mortgage life insurance or term life insurance:

  • Do you have dependents? You might want to make sure your mortgage is covered.
  • If you have a family, it could be worth considering a term life insurance policy to cover your mortgage, but also leave something to help them maintain their standard of living after you passed away.
  • Do you have other financial commitments like credit card loans or business loans? Make sure that is included in the amount the policy will pay out.

To find out if mortgage life insurance is right for you, or if another type of policy is a better fit, use our quote tool and call one of our experts to help you compare life insurance across over a dozen companies.