Mortgage Life Insurance

Mortgage life insurance, which is also called mortgage protection insurance, is a type of life insurance that fully pays your mortgage loan in the case of your death. For example, if the mortgage loan on your home is a 30-year $400,000 mortgage, then it would be appropriate to obtain a mortgage insurance policy that would pay a $400,000 death benefit. This way your beneficiaries do not have to worry about making mortgage payments in the event of your passing.

The guaranteed death benefit of traditional mortgage life insurance followed the amount of the principal that was due as the mortgage was paid down, so the insurance payout was higher at the beginning of the mortgage and then tapered down as the policyholder paid down the mortgage. The current thinking regarding mortgage life insurance is to buy insurance similar to a term life insurance policy in an amount equal to the original mortgage amount. This way, if you were to die, your beneficiaries would receive a benefit that would cover the balance of the mortgage that was owed at the time of your death and most likely have some money left to pay off other expenses.

Another type of mortgage life insurance is called a return of premium (ROP) insurance; in this type of term insurance, the insurance company returns your premiums at the end of the term period, so that your net cost for the insurance is zero. The term period coincides with the length of the mortgage, so your beneficiaries are guaranteed a death payout that would pay off the mortgage. If you are living at the end of the term, then you will have had insurance to cover your mortgage payoff over the term and you get your money back, for a net cost of nothing.

Since ROP insurance is more expensive than basic term life insurance, most people choose the latter for their mortgage life insurance coverage. A term life insurance policy with a level premium is guaranteed to maintain the same premium throughout the term of the insurance, which makes this type of insurance the most economical choice for mortgage life insurance. In addition, the term can be matched to the length of your mortgage, whether it is a 15-year mortgage, a 30-year mortgage, or some other length of mortgage.