Mortgage Life Insurance
Because a home is the biggest purchase most people make in their lifetime, most consumers are not in the position to take on the responsibility of a mortgage until their late 20s to early 30s. Furthermore, it typically takes them the rest of their life to pay off that mortgage.
But what happens if something happens to the borrower whose income is responsible for paying that mortgage payment each month? Most families in this situation must either sell or foreclose once financial burdens render them unable to afford the payments. It is for this very situation that mortgage protection insurance exists.
Below you will find information on mortgage life insurance policies and learn how to find the best mortgage life insurance for your unique circumstances.
Top 3 Companies
Ladder Life is a great option for life insurance to cover a mortgage. They offer an amazingly simple online application and competitive pricing. What makes Ladder unique is that they allow you to adjust your coverage amount as your needs change. This makes them the perfect choice for mortgage life insurance.
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.
Why 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.
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 the 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 can is primarily classified into two types – mortgage life insurance and mortgage payment protection insurance.
Mortgage Life Insurance
How does mortgage life insurance work?
The purpose of mortgage life insurance is to pay off a mortgage 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 mortgage and decreases gradually with the loan amount as the principle 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 life insurance policy, the lender is likely to be the beneficiary, which means the death benefit goes straight to them, not to the family.
Basically, mortgage life insurance is an excellent choice for people who want to get a more affordable life insurance policy to cover a debt. The premiums for mortgage life insurance are generally cheaper than a regular term life 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 the best rates. Other life insurance coverage options may be more practical, so consumers should consider all possible policy types.
Best Mortgage Life Insurance Companies
To protect your home and family, you should choose the best possible mortgage protection insurance company that stands out in stability, reputation, and affordability.
Ladder Life is a great option for getting life insurance 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 life insurance 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 Life Insurance Rates
Rates for a mortgage life insurance policy will be the same as a term life insurance policy. If you choose a decreasing term life insurance policy, the rates will be cheaper than a level term policy. Insurance providers calculate rates based on applicant’s age, height, weight, gender, medical history, coverage amount, and term length. Longer term lengths and coverage amounts equate to higher rates.
Speak with one of our licensed agents at 888-407-0714 to get an accurate mortgage life insurance quote.
Mortgage Payment Protection Insurance
Mortgage payment protection is a specific type of mortgage insurance designed to pay the borrower’s mortgage for a particular period of time if he or she becomes unable to work due to the reasons explained below.
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 provide homeowners who have become unemployed with a monthly income 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 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 policy holder 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.
Mortgage Life Insurance vs. Term Life Insurance
Many people think they 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 depreciates 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.
While the traditional term policy appears to be the better option, the following considerations may prove otherwise for some homeowners.
- A 30-year term life policy is likely to cost more than a 10- or 20-year policy, as premiums generally increase proportionate to term length.
- Premiums remain the same throughout the term of the term life policy, which means towards the end of the loan term, the policy holder will still be paying the same premium as during the first year of the policy, even though at that time, the mortgage is almost paid off and less coverage is needed.
One option that serves to bridge the gap is a hybrid mortgage life policy, which combines the benefits of mortgage life and term life insurance. For instance, Protective offers a policy with reduced premiums that are lower than those of a traditional term life policy but maintains higher coverage throughout the term of the policy.
How it Works
For a 20-year policy, the death benefit remains the same for the entire period, just like a regular term life policy. The premiums, on the other hand, are lower. If the insured passes away during the 20-year period, the beneficiaries will receive the entire death benefit amount, which is usually higher than what a traditional term life policy offers.
Policy holders also have the option to extend the policy after the 20th year by continuing to make the premium payments. The death benefit, however, starts to decline after the 20th year at a steady rate. By the time the mortgage is paid off, the death benefit is likely to be 10 percent or 20 percent of the original face value.
The advantages of these types of life insurance policies is the premiums are lower, which means less money is spent compared to what a traditional mortgage life or term life policy would cost. The coverage is much higher and remains the same till the policy ends.
An extension of another 10 years would reduce the death benefit at the end of the loan term but still enough to pay off any outstanding mortgage debt.
Choosing between Mortgage Life and Term Life Insurance
The choice between the two depends on the unique situation and needs of each family. If you think your family could benefit from the payout from a term life policy, particularly towards the end of the loan term, since the mortgage would be significantly lower by that time and could be paid off with a fraction of the death benefit, it might be the right choice for you.
If you, on the other hand, have a high-risk job, dangerous hobbies, or health problems that might cause your rates to be much higher for term life coverage, but you can still afford a significantly increased premium, due to cost a mortgage life insurance policy might be the best option for you, or perhaps a hybrid policy would make a better fit.
The Creditworthiness Conundrum
Mortgage life insurance and mortgage payment protection insurance are both voluntary. They are meant for people who can afford to make a standard down payment and whom banks consider credit worthy. But not everyone can afford the standard down payment, and not everyone has the extra income for a life insurance policy. This is where private mortgage insurance comes into the picture.
Private Mortgage Insurance (PMI)
The purpose of PMI is to protect the lender in case the borrower defaults on his or her mortgage payments. It is different from a traditional insurance policy in the sense that the payout is not meant for the benefit of the insured’s family but rather for the safety of the lender.
How Does it Work?
If, at any point during the term of a mortgage, the borrower is unable to make the payments and defaults on the loan, the bank usually forecloses on the property.
However, if the value of the property is less than the outstanding loan amount, the bank might not be able to fully recover its costs even after the sale. In such a scenario, if the homeowner is a PMI policyholder, the bank will be able to receive the payout and recoup its costs entirely.
Generally, applicants for a mortgage loan who cannot afford at least 20 percent down as a down payment are required to buy PMI. Banks and other financial institutions consider loan applicants who cannot afford to make a standard down payment as a high-risk borrower.
In these cases, to avoid turning the applicant down, the bank offers the option to qualify for a mortgage loan if he or she agrees to buy PMI, thus increasing monthly expenses. The amount paid towards PMI does not remain the same throughout the term of the loan, however. Since the insurance is linked to the mortgage, the premium amount reduces gradually as the policy holder builds equity.
Cancelling Your PMI
Moreover, borrowers are not required to keep paying PMI throughout the term of the loan. The Homeowners Protection Act of 1998 requires banks to cancel PMI once a customer has repaid 78 percent of the mortgage.
Unfortunately, many banks do not follow this rule and charging PMI throughout the loan term. To prevent this, homeowners should request their lenders to cancel PMI when they have reached the minimum equity limit.
The most vital aspect to remember about PMI is it is not designed to benefit the homeowner. It is meant to offset the risk the bank is taking by offering a mortgage loan. Ideally, it should be a very last resort.
Choosing the Right Mortgage Protection Insurance Policy
Before choosing any mortgage protection policy, homeowners should ask themselves if they really need it or if it is merely a recommendation of the bank or insurance agent. The unfortunate reality is many banks indulge in unethical practices when it comes to selling mortgage protection insurance.
Banks often try to talk their customers into buying mortgage protection insurance, even when the borrower does not need it.
For example, if you and your spouse both have a stable job and a steady source of income and if you have saved up a decent amount of money for a rainy day, you might be able to make your mortgage payments even during periods of instability, illness, accident, or loss of job.
This is not to say you do not need mortgage protection insurance if you have a substantial amount of money in savings. In many cases, mortgage protection insurance is exactly what a family needs, but homeowners should enter into a mortgage protection policy with thoughtful consideration and make a purchase for the right reasons.
Consider several factors including employment status, income capacity, and the needs and wants of your family—both short- and long-term—etc. and have a contingency plan in place for unexpected expenses. Making this list makes it easier to assess your situation and decide if you need mortgage protection insurance and if you do, what kind of policy is the right choice for you.
Before buying a policy, homeowners can do themselves a service by consulting an exceptional and prudent financial advisor, compare insurance quotes from different companies, and choose a policy best suits their needs.