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Mortgage Life Insurance

What is mortgage life insurance? First let’s determine what mortgage life insurance is not. Mortgage life insurance is not private mortgage insurance (PMI) which is required by your lender if you purchase a home and are unable to put down a down payment of 20% or greater of the home’s value. Private mortgage insurance is required by lenders because it is designed to protect the lender – not you. PMI protects the lender in the unfortunate event that the borrower defaults on the mortgage and the lender is not able to re-sell the home for enough money to pay off the mortgage.

Ok, so mortgage life insurance is not private mortgage insurance (PMI). Mortgage life insurance is generally a type of term life insurance. Typically, mortgage life insurance is a type of term life insurance known as decreasing term life insurance.

How does decreasing term life insurance work? The “decreasing” part of decreasing term life insurance means that the face amount, or death benefit, starts at X amount and then decreases over the length of the policy term. Usually, this does not mean that your premiums will decrease over time; they will stay the same, but rather just the face amount will decrease over time.

Why is this type of term life insurance potentially a good option for new home buyers? Let’s say that you are the proud new owner of a $350,000 house. You and your spouse purchased the home by putting down a down payment of $50,000 and then taking out a mortgage for the remaining $300,000. The mortgage option that you chose is a 30 year fixed mortgage. That means that in order to pay off your home then you will start out owing $300,000 from day one and then gradually over the next 30 years you will pay back principal and interest until the end of year 30 when you will own your home free and clear.

This is a great scenario but what would happen if you or your spouse passed away before the end of the 30 years? Would your family have difficulty being able to continue to make the mortgage payments? If so, then this is where mortgage life insurance is designed to step in. Let’s say that on the day you first purchased your new home you also purchased a decreasing term life insurance policy with an initial death benefit of $300,000 and a term of 30 years. If your policy’s death benefit is designed to closely mimic your amortizing loan balance for your mortgage then in the unfortunate event of a primary wage earner’s death during those 30 years then the beneficiary’s would be able to pay off the remainder of the mortgage balance free and clear – without having to struggle and make payments.

So why not just purchase a regular 30 year term life insurance policy rather than a 30year decreasing term policy? Everything else being equal, the premiums will be much cheaper on the decreasing term policy versus the regular term policy because the insurance company has to pay out a smaller death benefit as the years go on.

A word of caution is that although mortgage life insurance is a great idea – keep in mind that your life insurance needs should be evaluated as a whole – not just planning for the one particular need such as a mortgage balance. There are quite possibly many other areas where your loved ones would struggle financially so it is always smart to take the time and do a thorough life insurance needs analysis.

Be a smart insurance shopper and do your research. Take a few moments and compare free mortgage life insurance quotes from top insurance companies side by side by requesting free life insurance quotes now!

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