Mortgage Life Insurance

Your mortgage company may have sent you a letter or offered you a mortgage life insurance policy. Your lender would have explained how you can ensure that your home loan is not left as a debt for your heirs. Is this a good financial decision? Before you answer that you need to know what options you have available.

What is mortgage life insurance?

Mortgage life insurance is exactly what it sounds like. It is an insurance policy that in the event of death will pay off the remaining balance on your mortgage. Many mortgage company's will offer this as a benefit to their loan. You are required to pay the monthly premiums.

How does it work?

Mortgage life insurance is a type of life insurance policy. It is also known as a decreasing term policy. The benefit of the policy decreases simultaneously with your mortgage. For example if your mortgage loan started out at $200,000 then your mortgage life benefit would equal $200,000. As you pay your mortgage every month part of your payment will go toward reducing your loan amount. Your mortgage life insurance benefit decreases at the same rate. It will not pay you the full $200,000 in the event of death. It will only pay off the remaining balance on your mortgage loan.

The downside to this is your premium remains the same throughout the term of your mortgage loan. When your mortgage loan balance reaches zero your insurance policy is terminated. If there is still a balance on your mortgage at the time of passing, the policy will only pay that amount and will leave nothing for your heirs. The payment is directly to the mortgage company and not to your heirs.

Mortgage life insurance is not a good financial decision. You will end up paying more for this policy because the cost includes marketing fees and or profit incentives that go to the lender. Instead, buy traditional term life insurance

Level term life insurance

Traditional level term life insurance is a better financial option in regards to the value you receive. In the case of death, this type of policy will payout the full benefit amount directly to your heirs or beneficiary. If, at the time of passing, the balance on your mortgage is only $50,000 this type of policy will pay the full $200,000. This will give your heirs the ability to pay off the remaining mortgage loan in full with $150,000 left to your heirs.

Insuring your mortgage loan against the event of death is sound financial advice. Dealing with a loved one or a parent's death is difficult enough. Make sure you are getting the best value for the money you spend to protect your loved ones after you leave this world.