What is Mortgage Insurance ?
Mortgage insurance is a term used to describe either insurance purchased to protect a mortgage lender, like private mortgage insurance (PMI), or life insurance purchased to correspond with the insured’s mortgage amortization schedule.
Mortgage life insurance
Mortgage life insurance, which is also called mortgage protection insurance, is a specialized type of life insurance designed to mitigate the risk of taking out a mortgage. Some borrowers want this protection because a mortgage is such a large amount of debt.
Mortgage protection insurance is usually purchased at or around the same time you take out the mortgage. In fact, it might be available directly from your mortgage lender.
With this type of life insurance, the term of the policy (how long it lasts) and the policy benefit (how much it pays out if you die) both correspond with your mortgage amortization schedule. If, for example, you took out a 30-year mortgage, the mortgage life insurance policy will likely come with a 30-year term, as well.
Premiums are usually fixed for the mortgage protection insurance term, but the death benefit decreases as your mortgage gets paid off. In other words, at any point in your policy term, the amount the life insurer would pay out should equal the outstanding amount of your mortgage.
The policy names your mortgage lender as the beneficiary. That means that if you pass away, the death benefit goes straight to the lender. In other words, your family can’t expect any money from this policy. It does pay off your home, though, allowing them to maintain that asset without further financial investment.
Mortgage life insurance vs. other life insurance policies
Unlike other types of life insurance, mortgage protection insurance usually doesn’t require medical underwriting. That can be good news if you’re in poor health since an existing condition won’t prevent you from getting this coverage. If you’re healthy, though, it could mean paying more than another life insurance policy with the same death benefit.
Before buying mortgage protection insurance, you may want to compare it against term and permanent life insurance policies with the same size of death benefit. If you’re looking at a policy to cover your $300,000 15-year mortgage, for example, get a quote for a 15-year term life insurance policy with a $300,000 death benefit. If you’re in relatively good health, the term policy may be cheaper.
In that case, if you die shortly after purchasing the policy, your loved ones can use the death benefit to pay off your mortgage. But if you die later in the policy, when your outstanding balance is lower, your family will be able to pay off the mortgage, then use the leftover money however they see fit.
Other types of mortgage insurance
Mortgage life insurance isn’t the only type of mortgage insurance. Some mortgage lenders require borrowers to purchase mortgage insurance if they put less than 20% down on their home. Private mortgage insurance (PMI) is the most common example, but if you have an FHA, USDA, or VA loan, you’ll generally get your mortgage insurance through the applicable agency rather than privately.
The borrower pays for these mortgage insurance policies, but the lender benefits. If the borrower defaults on their loan, the mortgage insurance helps to keep the lender solvent. Generally, once the borrower has reached 20% equity in their home, they can get rid of the mortgage insurance policy and the associated premiums.