Do You Need Mortgage Life Insurance?
B.A. Risk Management
Life Insurance Agent
Did you recently buy a home and get bombarded with mail claiming that time is running out to buy mortgage life insurance? If so, it would look something like this.
If you received letters like this and are wondering if they are legitimate, you are in the right place. According to the National Association of Realtors, there were around 6 million homes sold in 2018. Millions of these letters are being sent out and many people are likely buying a product they do not need!
Read on to learn how to avoid this and make the financially sound decision for protecting your family.
I remember feeling intimidated after I purchased my first home and began receiving these letters. They read almost as if they are a legal document with a threatening tone, and they have left many wondering, “Is it required?”.
Being a life insurance agent, I knew that it was not required. And even if it was, it would have been addressed at home closing. However, this still didn’t ease the concern left in my head. What would happen to my house if I died? Do I have enough coverage?
When I think about my family’s needs, a home is the first thing I think about. It’s hard to imagine a world where my children have to move to a different home soon after being dealt a tragedy of losing a parent.
This exact problem is why life insurance exists. But do you need a special type of policy to cover your mortgage balance? No. Mortgage life insurance is something I seldom recommend, except in the rare scenario a person can’t qualify for a traditional term life insurance policy.
If you don't have time to read all of the information on this page, just know one thing. From a life insurance standpoint, a regular term life policy is cheaper and is all that is needed to provide financial relief from the loss of an income earner in your family. You don’t need a special type of policy just for your mortgage balance. Debt is debt. Just make sure you have enough coverage in force for your family’s financial needs.
Use the free tool below to compare prices on term policies. It includes rates from all the top companies and allows for quick and easy price comparison to save you money.
What is mortgage life insurance?
Mortgage protection insurance protects a homeowner’s home by making sure he or she does not pass on the debt burden to survivors in the event of the insured’s premature death. The policy is usually structured in such a way that the death benefit pays the mortgage off completely. The main differences between a regular term life policy and a mortgage policy is that the death benefit with a mortgage policy is reduced over time, and a regular term policy is cheaper.
Mortgage Life Insurance vs. Term Life Insurance
Most people are better off buying a regular term life policy in which the death benefit remains the same throughout the policy term, instead of a mortgage life policy, in which the death benefit reduces throughout the policy term.
For a 30-year mortgage life policy on a 30-year mortgage, the death benefit usually continues to reduce yearly until it bottoms out at 20 percent of the original face value of the policy by the end of the loan term. The death benefit on a traditional term life policy, however, remains the same until the end of the term. In the event of a claim, your family will be happy with the higher payout.
There is also the situation where you outlive your term. Most policies allow you to renew at a rate adjusted for your age. In this scenario you will be glad you still have the higher death benefit of the traditional term policy rather than the reduced death benefit of the mortgage life policy.
Is it needed?
A mortgage repayment is the single biggest burden most families must deal with if the primary earning member passes away prematurely. Even if the surviving spouse has a stable source of income, making mortgage payments while taking care of the family’s needs can be an incredibly difficult task. Life insurance serves its purpose in this scenario, and it is strongly advised to have a sufficient amount of coverage in force to provide for a loss of income and to pay all debts.
What happens to a mortgage when you die?
If a surviving spouse does not have a stable source of income, there is no way he or she will be able to afford continuing making the mortgage payments. In these types of cases, usually only one option remains—to sell the home. If the home has positive equity (if it is worth more than the amount owed), the family can sell it, use the money to pay off the mortgage completely, and keep the rest for their own additional needs. However, if the home does not have positive equity (it is worth less than the amount owed to the lender), the family will have to short sell or just move out and let the lender foreclose the property.
Either way, the family must relocate whether they want to or not. But mortgage protection insurance exists as a solution to this problem. It ensures the family home stays just should the household’s monthly income be reduced due to an unexpected death of the borrower.
Different Types of Mortgage Protection Insurance
Mortgage protection insurance is primarily classified into two types – mortgage life insurance and mortgage payment protection insurance.
How does it work?
Its purpose is to pay off the balance if the borrower passes away or if an injury or illness renders the borrower permanently disabled and can no longer work and afford the payments. The payout usually matches the full value of the balance and decreases gradually with the loan amount as the principal is paid off. The rate at which the payout decreases is usually proportional to the rate at which the mortgage balance decreases.
Who is the Beneficiary?
In most cases, the bank is both the policyholder, as well as the beneficiary. If the borrower passes away, the bank gets the payout, which usually covers the entire outstanding amount on the mortgage.
Some insurance companies, however, offer mortgage life policies in which policy holders can choose their own beneficiaries. For example, State Farm offers a policy in which the death benefit covers the entire loan amount at the start and decreases at a steady rate as the borrower repays the loan. The death benefit, however, does not go below 20 percent of the policy’s original face value at any point. Whenever the policy holder passes away, the beneficiary receives the death benefit as a lump sum, which is not taxable.
Pros and Cons of Mortgage Life Insurance
- It is easy to get qualified for these policies, as they have low entry barriers and easy-to-meet eligibility criteria.
- These policies pay off the entire mortgage in the event something happens to the policy holder.
- The premiums remain the same throughout the term of the policy, but the death benefit declines over time, even towards the end of the loan term, at which time the payout is likely reduced to 20 percent of the original face value.
- For a traditional mortgage policy, the lender is likely to be the beneficiary, which means the death benefit goes straight to them, not to the family.
The premiums for a mortgage policy are generally more expensive than a regular term policy. Thus, it is not the best option for everyone, especially those who are healthy and have a low-risk job and can qualify for an inexpensive traditional term policy. Other life insurance coverage options may be more practical, so consumers should consider all possible policy types.
Companies to Consider when Buying Coverage
To protect your home and family, you should choose the company that stands out in stability, reputation, and affordability. The list below includes traditional term and mortgage life insurance companies.
Ladder Life is a great option for getting a policy to cover a mortgage. Their product offers customers the ability to change their death benefit as their needs change. Thus, as the mortgage balance goes down, so can the coverage.
Ladder does not charge a fee for changing the coverage amount. The only change is the amount of the premium, in accordance with the change in coverage.
Ladder Life is one of the new Palo Alto startups disrupting the industry by allowing customers to change coverage amounts for free. The term product they sell is from Fidelity Security Life, which has been in business since 1969.
AIG Life Insurance Company
American International Group (AIG) is the world’s largest insurance company with more than 13 million customers. It has been in business for more than 160 years and is rated “A” (Excellent) for financial strength by AM Best.
The company offers competitive rates for term life insurance, particularly for higher-priced mortgages, for instance, $300,000 or more.
Transamerica offers a unique return of premium (ROP) term life insurance policy called Trendsetter ROP 30, and this policy is also ideal for new homeowners who are looking for mortgage protection.
The ROP term life policy provides adequate mortgage protection in addition to paying a return on premiums paid if the homeowner outlives the term of the policy. This return can then help pay for a home remodeling project, a down payment on a new home, or reinvested. If something does happen to the insured homeowner, the death benefit of the policy can help the beneficiaries cover the remaining unpaid mortgage.
Protective Life Insurance Company
Protective offers competitive and customizable insurance solutions across the country for people looking for mortgage protection. This 100-year-old company is a customer-centric, values-driven insurance company in the US.
Protective offers a unique term life insurance product called Protective Classic Choice Term, which is a good option for homeowners seeking mortgage protection.
its rates are up to 49 percent lower than the competition for this policy.
Nationwide Mutual Insurance Company
Nationwide is a Fortune 100 company offering a comprehensive range of insurance and financial services including mortgage protection insurance. Furthermore, the company offers services for convenient payments for homeowners who want to combine their insurance premiums and monthly mortgage payments, commonly referred to as escrow.
You can discuss with your insurance agent to learn more about these types of options that offer protection along with convenience of payments.
Mortgage Protection Insurance policy from State Farm Life Insurance Company or State Farm Life and Accident Assurance Company are excellent options for homeowners. Some State Farm auto insurance customers also select a State Farm Mortgage Life insurance policy to enjoy discounts on their auto premiums. The company offers a multi-line discount program.
State Farm lets policy holders choose the amount of coverage based on the remaining mortgage balance. After the first five years, the death benefit starts reducing continuously over the life of the policy. It will never drop below 20 percent of the original face value of the policy, though. A lifelong coverage option makes this mortgage term life policy convertible to permanent coverage, irrespective of health status. State Farm offers customizable mortgage protection insurance policy with riders and options that add greater value.
Mortgage Payment Protection Insurance
Mortgage payment protection is a specific type of insurance designed to pay the borrower’s mortgage payment for a particular period of time if he or she becomes unable to work due to the reasons explained below. It's basically disability insurance.
Temporary Disability Caused by Illness or Accident
If a homeowner becomes disabled due to an accident or illness, he or she could be out of commission for weeks or even months, depending on their condition. During this time, it might be difficult to make monthly mortgage payments.
Thus, this type of coverage provides the policy holder with a monthly income to pay the mortgage. These payments continue if the insured becomes disabled and unable to return to work. When the insured does return to work, the payments will cease.
If a homeowner becomes unemployed suddenly, it may be hard to make mortgage payments and take care of other family needs as well. A mortgage payment protection policy can help to pay the mortgage until he or she finds another job.
Illness and Accident Exclusions
In both the instances described above, there are exclusion clauses for which the insurance company does not have to pay the insured. These exclusions are explained below.
- The illness or disease is a result of a pre-existing condition developed before the policy holder purchased the coverage
- The injury is deliberate
- Taking a leave of absence due to pregnancy and childbirth
- The insured voluntarily quit his or her job
- The insured is fired due to deliberate misconduct
- The insured is fired during the policy’s initial exclusion period, which can be anywhere from 90 to 120 days
Mortgage Payment Protection Insurance – What You Need to Know
- When it comes to mortgage payment protection policies, homeowners generally have three choices—policies that provide illness and injury coverage, policies that provide unemployment coverage, and policies that provide both types of protection.
The third type is typically more expensive than the first two, but it offers comprehensive protection against unexpected setbacks in professional life, health problems, and periods of instability during which it is a struggle to make loan payments.
- Mortgage payment protection policies typically have a deferred period, during which payments will not be made. For instance, some policies require a 30-day absence from work before monthly payments start.
The specific deferred period as well as other related conditions might differ from one insurance company to another.
- Mortgage payment protection insurance covers loan payments only for a specific period of time. Once the insured recovers or becomes employed again, the payments stop.
Life insurance companies also have a rule wherein once a policyholder claims illness/injury/unemployment benefits, a certain period of time must occur before the policy holder can make another claim. However, during this time, the policy holder must continue to pay premium payments regularly to keep the policy active.
- Part-time employees or seasonal workers might not qualify for mortgage payment protection insurance.