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Traditional life insurance and mortgage life insurance can both pay off your home after you die. But a policy tailored to your mortgage isn’t necessarily the best way to pay it off.
Why do I need life insurance?
For many people, buying their first home is the biggest investment they will make in their lives. A mortgage takes years to pay off, and if something happens to you and your family can’t make the mortgage payments, they could lose the house. Having a homeowners life insurance policy in place can help you make sure that never happens.
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Mortgage life insurance vs. traditional life insurance
| Traditional life insurance | Mortgage life insurance | |
|---|---|---|
| Who gets the money? | Your chosen beneficiary | Your mortgage lender |
| How much coverage do I get? | However much you choose | The amount left on your mortgage |
| What can the money be used for? | Anything | Mortgage debt |
| Can it cover short-term disabilities? | Yes | Yes |
| Can it cover long-term disabilities? | Yes | No |
*Chart is based on standard policies. Specific coverage details will vary between lenders
Compare providers that offer mortgage life insurance
What is mortgage life insurance?
Mortgage life insurance, also known as mortgage protection insurance, is a type of life insurance that pays off your mortgage when you die. The check goes directly to your lender, which means that your family doesn’t see any of the payout.
Will my premium decrease as I pay off my mortgage?
No, most mortgage life insurance premiums won’t go down as you pay off your home. Depending on your policy, that can mean one of two things:
- If your policy only covers your mortgage, the amount of coverage you have will go down each month — even though your premiums are the same. This is the most common type of mortgage life insurance.
- If your policy has a stated benefit amount, likely the amount left on your mortgage when you took out the policy, the difference between what you owe on your house and how much coverage you have will be payed to your named beneficiary or estate.
Limited benefit of mortgage insurance
Mortgage insurance serves a single purpose: to pay off the balance on your house if you die. The death benefit goes directly to the lender, which means your loved ones won’t receive any money.
If you have people who depend on your income, you might want to look into a regular life insurance policy. That way, if you die prematurely, your beneficiaries can use the cash to settle their most urgent debts, whether that’s mortgage payments, medical expenses or college tuition.
Life insurance can offer greater protection
With traditional life insurance, the payout is passed onto your beneficiaries. They can use that money to pay off the mortgage, as well as any other debts of expenses. This flexibility, and the fact that you can choose how much coverage to buy, makes this a preferable option for many homeowners.
If you decide to purchase a regular policy, you can opt for term life insurance or permanent life insurance.
- Term life insurance offers coverage for a set period of time. If your top priority is making sure your beneficiaries have the money to pay off the mortgage, you could take out a policy to match your mortgage term. For example, if you have a 20-year mortgage, you might buy a 20-year term life policy.
- Permanent life insurance lasts your entire life, and builds cash value over time. Since they offer lifelong coverage and become a cash asset, they tend to be more expensive than term life. There are a few permanent policies on offer, including whole life, universal life and variable life.
What factors (aside from death) could prevent me from paying my mortgage?
There are several reasons you could default on your mortgage repayments, including:
- A family member could become ill and require full-time home care.
- You or your partner could get sick and be temporarily unable to work.
- You or your partner could become disabled and be permanently unable to work.
- You or your partner could lose your job.
How much will it cost me?
How much you’ll pay depends on what type of insurance you get.
Life insurance
Premium prices will be based on how much coverage you have and how much of a risk you are. Your risk is based on your:
- Age. Younger people will pay less.
- Smoking and drinking habits. Expect to pay significantly more if you’re a smoker or heavy drinker.
- Health. You’ll pay less if you’re a healthy weight — but pre-existing conditions can drive your premiums up.
- Hobbies. If you spend your time rock climbing, scuba diving or skydiving, you’re considered to be a higher risk.
- Occupation. If you have a dangerous job, your premiums will be higher.
- Gender. Women generally pay slightly less than men for the same policy.
- Single or joint coverage. Expect to pay more if the policy covers both you and your spouse.
- Coverage type. Adding critical illness insurance or disability insurance will cost more.
Mortgage life insurance
The underwriting process for mortgage life insurance is much more straightforward — premiums will be based on:
- Single or joint coverage. Expect to pay more if the policy covers both you and your spouse.
- Coverage type. A policy that includes coverage for both death and short-term inability to pay will generally cost more.
- Mortgage amount. Your coverage is based on how much you owe when you take out the policy.
- Age. Younger people may pay less.
When do mortgage protection policies end?
Mortgage life insurance policies end when:
- The policy owner’s mortgage is paid off or foreclosed.
- The loan is canceled.
- The mortgage protection policy is canceled.
When is mortgage life insurance a good idea?
People who have health problems that make it either extremely expensive or impossible to get traditional life insurance may benefit from a mortgage life insurance policy.
How do I compare mortgage life insurance quotes?
If you’re considering mortgage life insurance, compare policies based on:
- Premiums. Look for a policy you can easily afford.
- Maximum entry age. Some policies require you to be under a certain age.
- Disability definition. For policies that cover disabilities, look at what specifically is covered — and if there’s a cap on how long you can be out of work.
- Waiting period. Some policies won’t go into effect immediately.
- Claim policy. The process of claiming the benefit can vary between providers, so it’s a good idea to look into how claims work. This should be displayed on the providers website.
- Policy discounts. Some providers will offer a premium discount for joint policies. This is generally between 5-10%.
- Benefit payment. It is crucial to assess how the benefit will be paid in the event of the claim. Some providers will pay out the flat amount you insured, while others will just pay out what’s left on the mortgage.
Bottom line
It’s a good idea to have some sort of insurance in place to handle your debts after you die. While life insurance offers more flexibility and often comes at a lower cost, mortgage life insurance can be helpful for people with pre-existing conditions who can’t qualify for a traditional life insurance policy.
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