What Is Mortgage Life Insurance? 

Mortgage life insurance is essentially a term life policy that is specially designed to help with the repayment of mortgage debts and other associated costs in case the borrower dies.  

These policies are quite different from traditional life insurance policies. For a conventional policy, death benefits are usually paid out when a borrower dies. However, with mortgage life insurance, the policy won't pay out unless the policyholder loses their life before completing their mortgage payments, and the beneficiary is usually the mortgage lender.  

The term of the life insurance policy ideally matches that of the mortgage, and the death benefit will be lowered every year in order to correspond with the new outstanding amortized mortgage balance as the mortgage payments are made.  

Key Takeaways 

Mortgage life insurance policies are specifically designed to pay out benefits to the mortgage lender in case a policyholder dies during the lifespan of their mortgage loan.  

The term policies are usually structured in such a way that they match the remaining years on a mortgage, meaning that the payout benefits will be adjusted on an annual basis to match the reduced total mortgage balance after every year.  

Any borrowers that are required to take out mortgage life insurance by their lender may also choose to take up permanent life insurance, where they will be able to name new beneficiaries once the mortgage obligations have been satisfied.  

Understanding Mortgage Life Insurance 

There are two primary forms of mortgage life insurance: 

Decreasing term insurance: Under this policy, the policy size falls in proportion to the outstanding mortgage balance until both get to zero.  

Level-term insurance: Here, the policy size doesn't decrease, which makes it ideal for situations where the borrower takes up an interest-only mortgage.  

Before purchasing mortgage life insurance, the policyholder should examine and analyze the costs, terms, and benefits of the policy carefully. Keep in mind that there are two lifespans to consider – the lifespan of the mortgage and the lifespan of the policyholder. It's also important to think whether you can get the same coverage levels for your family at a lower cost, and perhaps with fewer restrictions, by purchasing term life insurance.

Term Life Insurance vs Mortgage Life Insurance 

The mortgage life insurance policy is not the only way of getting life insurance for a mortgage. Another alternative to mortgage life insurance is the term life insurance policy.  

Term life insurance essentially gives your family flexibility in terms of how they use the life insurance payout. With the term life insurance policy, you can match your policy length and coverage amount to the mortgage. You can also choose a coverage length or amount that accounts for other financial responsibilities, including your children's college tuition or your annual income.  

Mortgage life insurance is specifically designed with one purpose: to pay off your mortgage balance. You may be allowed to choose to cover only part of the mortgage. However, aside from that, you have limited flexibility in the amount of coverage you can receive. In case the financial needs of your family change over time, the mortgage life insurance won't give you options. Any payout will automatically go to the mortgage lender.  

On the other hand, the term life insurance payout will go to the beneficiary you choose, such as your spouse or children. The beneficiary is allowed to use the money to cater to any pressing financial needs. Plus, you can make your own choice in terms of the policy length and coverage amount. Your family will be able to use the term life insurance payout with the following: 

The mortgage payment 

Children's college costs 

Credit cards and other debt 

Your funeral and similar expenses 

As a replacement for the income, you would have earned. 

Other types of life insurance will give your family great control over how the payout can be spent, such as with whole life insurance. However, when it comes to covering debts like a mortgage, term life insurance gives you the most value for your money.  

Benefits of Mortgage Life Insurance 

The mortgage life insurance policy offers near-universal coverage with minimum underwriting. There's usually no blood sample or medical examination required, and this can be a valuable insurance policy option for homeowners suffering from severe medical conditions (pre-existing) that would have otherwise prevented them from taking up traditional life insurance.  

Other benefits include: 

A mortgage life insurance policy means that the beneficiaries won't have to wonder what will happen to the family home. In case a policyholder becomes gravely ill and unable to work or loses their life, the mortgage life insurance policy will essentially pay off the remainder of the mortgage loan. 

With certain exceptions, most of the traditional life policies don't pay out unless the policyholder dies within their coverage period. In contrast, most mortgage life policies offer coverage that payout in case you're unable to work or become disabled, which makes this form of insurance more versatile compared to the traditional term or whole life policies.  

The coverage also helps eliminate the worries about where your family would live in case you're unable to work. Since the mortgage will be paid off in case the worst happens, your family will always have a place to live. They only need to pay property taxes and insurance.