A mortgage life insurance is an insurance policy specifically designed for mortgage borrowers to pay off the remainder of their mortgage debts once they pass away. The insurance will only take effect when the borrower dies or becomes seriously disabled while the mortgage itself is still in existence.
There are mainly two basic kinds of mortgage life insurance. One is the decreasing term insurance where the size of the policy will decrease with the outstanding balance of the mortgage until both have reached zero. Another type, called the level term insurance, is the policy of which the size does not decrease. If the borrower has an interest-only mortgage, the level term insurance will be a better choice.
Most people are likely to buy the mortgage when or after they purchase their house. Generally speaking, a mortgage life insurance has a specified term which is the same as the actual mortgage. For instance, if you take out a 20-year fixed-term mortgage, the insurance will accordingly cover you for 20 years. Note that a mortgage life is not a mandatory type of coverage.
Advantages of Mortgage Life Insurance
- No medical examination is required.
You don’t have to submit a test or a blood sample, although some health questions are still required to answer. This makes the insurance an ideal option for those borrowers with serious preexisting medical conditions.
- Heirs of the policyholders can be well protected.
Once the borrower purchased the mortgage life insurance, the heir will not have to worry about the family house being deprived since the insurance will pay off the debt. This means that the family could still have a place to live after the borrower died or lost the ability to work, which will be a great relief for the policy holder.
- Policyholders do not have to die to get the coverage.
Unlike other traditional insurances, most mortgage life insurance policies will also take effect if the policyholder becomes disabled or unable to work, thus making the insurance more flexible.
Disadvantages of Mortgage Life Insurance
If you buy the decreasing term insurance, your mortgage life insurance payout will decrease as you pay down your home loan debt. Yet your insurance premiums will not change despite the reduction in the mortgage debt. This means you will have to pay the same amount of money towards the policy until the home loan had been paid off.
A mortgage life insurance does not have a cash value component and it does not cover anything else. The whole benefit will go straight to the home loan lender who is the named beneficiary, and there won’t be other funds left for the family to use as other crucial expenses.