Mortgage protection insurance offers limited benefits

By Ryan Staib Posted : 02/12/2009

Mortgage protection insurance refers to a type of decreasing term life insurance policy where you pay a non-changing premium for the duration of your mortgage. If you die while the policy is in effect, the insurance pays off your mortgage. The lender can become the beneficiary of the policy if the borrower paying for the policy defaults on the loan.

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Mortgage protection insurance cost factors
If the outstanding balance of your mortgage is high, your monthly premium will be high as well, and your premium will remain the same even as the balance decreases. This is because you are more likely to die as time goes on, increasing the likelihood that your life insurance company will have to pay on your policy.

Mortgage protection insurance can be purchased either at the same time you buy a home, or at any time in the future. As with other types of life insurance, your age, smoking status and value of your death benefit (the amount left on your mortgage) are taken into account when a life insurance company reviews your application and sets a price.

Mortgage insurance options
Mortgage protection insurance policies will only pay the balance of your mortgage at the time of your death (or maybe a little more if you paid ahead on your mortgage). If you decide this is appropriate for your situation, remember that a regular decreasing term life policy—one not marketed as a "mortgage protection" policy—can be used for the same purpose, and may also cost less. However, if you want to give your beneficiaries a choice of how to use the insurance money, consider level term life insurance instead.

Depending on your insurance company, joint mortgage protection insurance may be available that covers both you and your spouse and pays out when either of you die.

If you refinance, see if a new policy will get you a better premium. If you default on your mortgage, check with your life insurance company and see if they will extend your coverage.

Mortgage protection insurance and private mortgage insurance

Though they have similar names, these two types of insurance are not related. Private mortgage insurance (PMI) is typically required by the lender when you purchase a house and make a down payment of less than 20%. "Lenders take a risk when a buyer puts down less than 20%," says Sam Belden, Vice President at Insurance.com. "Private Mortgage Insurance is a way for lenders to protect themselves if a buyer didn't put much down and ends up in foreclosure." In today's difficult economic environment, few lenders will even grant a loan with less than 20% down, so PMI may not be offered in the future.

Although PMI makes it easier for you to get a loan and can help you get a house without waiting to build up savings, it pays the lender, not you. It does not reduce the amount of money you owe the lender. It is not a substitute for life insurance or mortgage protection insurance, which will pay off all or most of your mortgage in the event of your death.

Not what you were looking for? Have questions or feedback? Please let us know.

Originally posted September 20, 2004.

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4 Responses to "Mortgage protection insurance offers limited benefits"
  1. Jim Stratil 05, Apr, 2013

    Mortgage protection insurance certainly has its place. But in my opinion a level term life policy is the best answer for most borrowers.

      Reply»  
  2. Gloria Carty 10, Mar, 2013

    I would like information on mortgage protection insurance

      Reply»  
  3. Timothy Terry 31, Jul, 2012

    I need morgage protection insurance

      Reply»  
    1. Shelley Martin 03, Jan, 2013

      I would like information on mortgage protection insurance

        Reply »  

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