The promise of mortgage life insurance is simple and appealing — when you die, your family can keep the house with its mortgage paid off. The reality is more complex. For many people, a normal term life insurance policy is a better option than mortgage life insurance.
How mortgage protection insurance works
As the name implies, mortgage protection insurance (also called mortgage life insurance and mortgage protection life insurance) is a policy that pays off the balance of your mortgage should you die. It often is sold through banks and mortgage lenders.
The reason lenders like mortgage life insurance is simple — they’re the ones who get paid when you die. The death benefit of a normal life insurance policy goes to beneficiaries you choose. But with a mortgage life insurance policy, the beneficiary is the lender, which will be paid the remaining balance of your mortgage.
That means your family only benefits indirectly. If you owe $150,000 on your mortgage, the mortgage protection policy will pay it off, and the property will be mortgage-free, but your family will have no say in how that money is spent.
Since your mortgage decreases over time as you make payments, that means the death benefit of your mortgage life insurance decreases, as well.
Is mortgage protection insurance required?
Mortgage protection insurance isn’t required. It isn’t the same thing as private mortgage insurance, which many banks or lenders will require you to buy.
The terminology and acronyms make it easy to mix the two products up:
Mortgage protection insurance, or MPI, is a type of credit life insurance, which means you aren’t required to purchase it and it pays the lender instead of your beneficiaries.
Private mortgage insurance, or PMI, is a different product. Your lender can require you to purchase private mortgage insurance if your down payment is less than 20%.
Do you need mortgage protection insurance?
The inflexibility of mortgage life payouts means you’re usually better off with a regular term policy with enough coverage to pay off your mortgage. Then, when you die, your family has options:
They can use the death benefit to pay off the house and keep any leftover cash.
They can also choose to skip paying off the mortgage and use the money as they see fit — it’s their money, not the lender’s.
A mortgage life insurance policy locks your loved ones into paying off the mortgage, even if other bills and needs are more pressing.
The biggest benefit of mortgage protection insurance is its convenience. It lines up exactly with your mortgage balance and there’s usually no life insurance medical exam required to buy a policy.
If you’re denied for term life insurance or whole life insurance for medical reasons, mortgage life insurance may be an option to financially protect your home.
Mortgage protection coverage can also supplement an individual life insurance policy. For example, if your mortgage is paid off with money from a mortgage life policy, then your family could use all the benefits from your term or whole life insurance policy for bills and other expenses.
Why you shouldn’t buy mortgage protection insurance
Mortgage protection insurance has limited advantages and serious drawbacks.
Lack of flexibility. While the death benefit can remove the financial stress of paying a mortgage, your family could still be left with bills and other debt they can’t afford. With a regular life insurance policy, your family can use the payout for the most pressing bills, whether that’s mortgage payments, other loans or college tuition.
Declining payout. Even though your premiums stay the same, the payout amount decreases as you pay your mortgage off. And that premium is often much higher than what you would pay for term life insurance.
A term life insurance policy can provide more bang for your buck than a mortgage life insurance policy. A term policy allows you to choose your coverage amount and policy length. If you want to line up those options with your mortgage you can, but you’re not forced to.
In short, term life offers most of the benefits of mortgage protection insurance but with lower premiums, more flexibility and more control.