Is Mortgage Life Insurance Worth It? Pros and Cons

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Buying a home is one of the most significant financial decisions one could make, and it involves paying off a mortgage that can last multiple decades. Will a mortgage life insurance policy work?

What Is Mortgage Life Insurance?

Mortgage life insurance, also called mortgage protection insurance, is a type of term life insurance that can repay your mortgage debt and its associated costs if you die before you can pay it in full. 

This type of insurance provides peace of mind, allowing your loved ones to repay the mortgage and keep your home, even after you pass. It also protects your lender from losing the money they loaned out.

How Does it Work?

Only 51% of Americans have life insurance, which can bring significant risks to themselves and their families if they have substantial debt.

Mortgage life insurance has the same value as your mortgage obligation. It is also pretty easy to get, as there are no additional requirements to qualify for it. There is also usually no waiting period, so it can take effect immediately. 

Your lender will be the beneficiary of the insurance payout. If you die before you pay off your mortgage, the insurance pays off the remainder of your debt.

There are two main types of mortgage life insurance:

• Decreasing term insurance: The coverage amount decreases over time as you slowly pay your mortgage. This type of insurance is ideal for most traditional mortgages.
• Level term insurance: The coverage stays the same, regardless of your mortgage balance. This type is best for interest-only mortgages.

Decreasing term insurance is usually the cheaper option between the two, as the payout can diminish over time. However, it will only cover the remainder of the mortgage. Level term insurance can be more expensive, as the total payout stays the same. Your family may also receive some extra money if you manage to pay down a portion of your mortgage.

Before buying an insurance policy, you should carefully consider the associated costs, terms and the benefits you may receive based on your circumstances. 

The Advantages of Mortgage Life Insurance

For many people, their home is their biggest expense, and it only makes sense to secure this property for themselves and their families. The 30-year mortgage rates in 2024 were some of the highest recorded in the 21st century.

Mortgage life insurance is an effective way to ensure these debts get paid and you get to keep your home, regardless of future events. These are the advantages of this policy:

Ensures Mortgage Repayment

If you keep up with your monthly premiums, a mortgage life insurance policy guarantees to pay off your outstanding mortgage, even if you die before repaying it yourself. This benefit ensures that your family or relatives do not inherit any of your debt, so the property remains in their hands.

Peace of Mind for Families

A family death is already stressful in itself. Debt can contribute to these troubles. The average American has a debt of $105,000, with the largest percentage usually being their mortgage. 

Having the resources to cover significant debts like mortgages can give your family peace of mind. It provides the reassurance that your family won’t lose their home to financial challenges. Ensuring the finances are handled allows families to focus on grieving and healing.

Easier Approval

Mortgage life insurance is often easier to get than other types of insurance. Most providers don’t require a medical exam, which other life insurance policies usually ask for. As a result, they are more accessible to individuals or families who might not be able to get traditional insurance policies due to their age or health conditions.

Protects Other Properties and Investments

If you own multiple properties or investments, this insurance can help protect the rest of your portfolio. Even if you die, you can rest easy knowing that your business, investments and other properties will stay in operation.

The Disadvantages of Mortgage Life Insurance

While mortgage life insurance offers several benefits to homeowners, it might not be for everyone. In some cases, the costs of maintaining this insurance policy might outweigh its benefits.

Declining Payout Value

If you get a decreasing term insurance, which is the case for most traditional mortgages, you might not get your money’s worth. The coverage amount will decrease as your mortgage gets paid off over time, but your monthly premiums usually remain the same.

Limited Beneficiary Flexibility

For a mortgage life insurance policy, the payout goes directly to the lender, not your family or estate. On one hand, it ensures the money gets to its intended destination. However, it also means your family won’t be able to use the funds for other expenses, like emergencies or other debts.

Potentially Higher Cost

While these insurance policies are easier to get, they can also have higher monthly premiums, especially concerning your age and health. If you’re on the younger side with no significant health conditions, you might be able to get lower premiums with other types of life insurance policies.

Mortgage Life Insurance vs. Other Types of Insurance

Life insurance comes in different forms with their own specific rules. With its specificities surrounding beneficiaries and payout amounts, mortgage life insurance works differently from other types.

For example, traditional life insurance pays off a lump sum to your beneficiaries when you die. You can choose your beneficiaries, be it your family members, estate or business, and they can do what they want with the money. It can also build cash value over time, as it isn’t tied to your mortgage amount.

Mortgage life insurance can also get confused with private mortgage insurance sometimes, but they have some key differences. Private mortgage insurance also protects your lender, but it only applies when you default on your payments. It’s also a requirement for some lenders, especially if you make a down payment that’s less than 20% of the purchase price.

Is Mortgage Life Insurance Right for You?

Mortgage life insurance is a more niche type of insurance policy that can serve a specific portion of homebuyers. It does have its benefits — it will work for those with significant mortgage debt, health issues and dependents. However, it might not be the most cost-effective option for others. 

Before buying any insurance, carefully evaluate its costs. You can also consult a financial advisor so you can make the right decision for your circumstances.