Does Mortgage Protection Life Insurance Fit Your Needs?

Mortgage protection life insurance can protect your heirs.

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Mortgage protection life insurance protects your loved ones in case you die while your home mortgage is outstanding. Its purpose is to meet the needs of families when a surviving relative might not have sufficient income to cover the payment on the home but doesn't have another place to live. The policy would pay out the remaining balance on the mortgage in the event of your death if you were the policyholder. With a mortgage life insurance policy, the premiums can usually be included in the monthly house payment.

A Policy for Peace of Mind

Mortgage protection life insurance can protect either a co-borrower on the mortgage or someone who is not named on the mortgage. If your death would leave the person or people who share your home without an income stream or these co-habitants wouldn't qualify to assume the mortgage, a policy of this kind warrants consideration. Some mortgage life policies pay out if you suffer an injury that effectively disables you for life and makes it impossible for you to work.

Policy Declines in Value

Unlike other life insurance policies, mortgage protection life insurance declines in value as the insured person makes more payments to the policy. A mortgage protection life insurance policy is initially set up for the full balance of your mortgage. With each payment you make, the potential payout is slightly less, corresponding to your lowered principal balance. If you pay off your mortgage in your lifetime, the insurance policy expires and you have nothing to show for the payments.

Term Life Insurance Is Another Option

Purchasing a term life insurance policy for the amount of your mortgage loan might be a better investment. With a term life policy, your payments go toward something you can cash in at a later date, and the account retains its value even after you pay off your mortgage. This option would make financial sense for a younger or healthier mortgage holder. But term life insurance policy premiums are based on the health and age of the policyholder, whereas mortgage protection life insurance policy premiums are based on the balance of the mortgage covered by the policy.

Private Mortgage Insurance Is Different

Don't confuse private mortgage insurance with mortgage protection life insurance. Private mortgage insurance is required on most loans that exceed 80 percent of the house’s value. These two types of insurance are commonly confused, but this could be a costly error if you expect PMI to pay off the mortgage after your death. PMI protects the lender -- not you -- against the possibility that you'll default on the mortgage.