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.
  • In the event of a disability or illness such as a heart attack, cancer or stroke – mortgage protection life insurance will pay out a lump sum of cash while you’re alive to get you the best care possible and help pay the mortgage.

As your outstanding mortgage balance 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.

It’s worth noting that many mortgage policies have other benefits such as paying your premiums if you become unemployed or a return of premium option where if you outlive your term life insurance, you get all your premium payments refunded back to you (you’re paying at least double for that one though!)

How is Mortgage Life Insurance Different than Traditional Life Insurance?

house with mortgage protection insurance

Life insurance only pays out when you pass away.

Mortgage life insurance will pay out in the event of a chronic, critical or terminal illness and have other benefits such as waiving your premium payments if you become unemployed.

Mortgage life insurance is also more expensive than traditional life insurance because traditionally there isn’t a medical exam and you can get approved in days instead of weeks/months. That’s the cost for convenience and the added living benefits.

Mutual of Omaha, Foresters, Americo and Kansas City Life are some life insurance companies that have popular mortgage protection products. All of them have similar benefits when it comes to paying on chronic, critical and terminal illness, however all of them have additional add-on riders that you can customize your policy with.

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

Pro Tip: Don’t buy decreasing term insurance…ever!

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’s best for working class families who keep putting off life insurance because there is no medical exam required to buy this policy. You typically get a decision within 48 hours.

You can even apply over the phone as these products have electronic signatures. So you don’t even need to meet with an agent face to face.

Living Benefits

As mentioned above, your policy pays a percentage of the death benefit (up to 95% depending on the company) in the event of heart attack, cancer, stroke or any other qualifying conditions.

There’s also additional riders that can help when times get rough. Riders such as an unemployment rider that will pay your mortgage life insurance payments for you in the event you become unemployed.

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.

Minimal Underwriting

The electronic underwriting systems check your MIB report, Pharmacy report, Motor Vehicle Report and sometimes Lexis Nexus to help underwrite your risk. This is on top of the questions you have to answer on the application.

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.

Your Premium Will Be Higher Than Term Insurance

Mortgage life insurance payments are higher than regular term insurance.

If you’re going for affordability, we recommend buying traditional term life insurance with living benefits. The process may take 4-6 weeks to get approved and you may have to take a medical exam (it’s free and nurese comes to your home), but you could save around 40% by going through that trouble.

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.

Difficulty of Getting an Accurate Quote

It is sometimes difficult to get an accurate quote for mortgage life insurance protection online. There aren’t very many places that will quote the product online and if they do, they only have access to one product or so.

There is less transparency in the mortgage life insurance market since it’s typically marketed by insurance agents who show up at your home after you complete a card sent to you in the mail. (I’m sure you got bombarded after you purchased your home)

We recommend speaking with an independent agent. If you complete a form for a quote on this page, an independent agent with access to multiple mortgage protection and traditional term products will be in touch by email and phone.

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.

Mortgage Life Insurance Frequently Asked Questions

Do you need life insurance with a mortgage?
No. It’s not required, but it’s highly advised. Life insurance doesn’t only cover your mortgage in the event you pass away so your family can still live in the house, but it can also provide lump sums of cash in the event of a heart attack, cancer, stroke or other triggering event (if you buy the right kind of mortgage protection life insurance)

What is the average cost of mortgage life insurance?
It’s typically 40% more expensive than traditional life insurance. Remember that you get a lot more benefits than traditional life insurance though.

What happens to my mortgage when I die?
Nothing. Your heirs will still need to keep paying it to stay in the house. If you have life insurance, your heirs can pay the mortgage off with the death benefit from life insurance.