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Mortgage Life Insurance vs. Term Life: The Best Option for Homeowners

Aug. 3, 2015
Insurance, Life Insurance
Mortgage Life Insurance vs. Term Life Insurance
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If you’re in the process of buying a house, it won’t be long before mortgage life insurance offers start arriving in the mail.

Sold by mortgage lenders and insurance companies, mortgage life insurance (sometimes called mortgage protection insurance) pays off your home loan if you die with a balance. The idea sounds sensible: Your family wouldn’t have to worry about mortgage payments if something happened to you, and they lost your income.

But among the options for homeowners’ life insurance, term life insurance is usually a better choice. Here’s a look at the main advantages.

Term life insurance lets you choose your benefit amount

With a term life policy, you can buy enough coverage to meet all of your family’s needs — not just repayment of the mortgage. Term life insurance buyers typically choose a coverage amount that can also replace the insured person’s income and cover their children’s college tuitions and other expenses.

» Compare life insurance prices: Get term life insurance quotes.

Mortgage life insurance, on the other hand, is designed solely to pay off your mortgage. With many mortgage life policies, the death benefit steadily declines to match the mortgage balance.

Term life insurance gives your family flexibility

Term life pays a death benefit to any beneficiaries you choose, such as your spouse, if you die within the policy’s term. Your beneficiaries can use the money however they like. If paying off the mortgage isn’t a priority for them, they can use the money for more critical needs.

Under some mortgage life policies, the benefit is paid directly to your lender, not your family.

Term life coverage can extend past your mortgage term

Many providers offer term life insurance policies lasting between five to 30 years. Buyers can choose a term based on their longest-term financial obligation, whether it’s a mortgage, their children’s college years or another large debt.

By contrast, a mortgage life policy coincides with the length of your home loan. Some mortgage life policies end if you refinance.

Term life gives you more bang for your buck

Term life is often cheaper for the amount of coverage you buy than mortgage life, especially if you’re healthy.

» COMPARE: NerdWallet’s life insurance comparison tool

Most mortgage life insurance policies don’t require applicants to go through a life insurance medical exam. This may sound convenient, but you’ll pay for the privilege of not providing health information. The more insurers know about your medical history, the more accurately they can price coverage, which translates into lower rates for many term life applicants.

When mortgage life might make sense

You might consider mortgage life if you have a health condition and can’t qualify for term life insurance, but still need coverage for your mortgage.

Take these steps before you buy mortgage life:

  • Seek quotes or talk to an agent before deciding that term life insurance isn’t an option. If you can’t qualify for traditional term life for health reasons, get quotes for “simplified issue term life,” which doesn’t require a medical exam. The application only asks a few health questions. Available coverage amounts for simplified issue are smaller than for traditional term life, but it’s worth comparing prices for simplified issue and mortgage life.
  • Read the fine print on the mortgage life insurance policy. Does it cover you regardless of the cause of death, or only in the event of an accident?
  • Compare quotes for mortgage life policies from different companies to get the best deal.
  • Just as you would when buying any type of insurance product, check the financial strength rating of the insurance company selling the policy. You can find ratings on the websites of independent rating firms such as A.M. Best, Fitch Ratings, Moody’s Investor Services or Standard & Poor’s Ratings Services. You might have to register on the websites to see the ratings, but the services are free.

Other forms of insurance sound similar

There are other insurance products with strikingly similar names to mortgage life insurance, so be careful not to get them confused:

  • Private mortgage insurance, or PMI, is another product you might encounter during the homebuying process. PMI pays the lender — not you — if you default on the loan for any reason. You’re generally required to purchase PMI if you put less than 20% down when buying a home. The cost is factored into your monthly mortgage payment.
  • Mortgage disability insurance pays off your mortgage if you become disabled and can’t work. “Mortgage accidental death insurance” pays off the mortgage if you die in an accident. However, these situations can also be covered by disability insurance and term life insurance, respectively, both of which would give your family more flexibility with payouts.

Buying a home is a good time to evaluate your need for life insurance. Rather than jumping at unsolicited offers for mortgage protection insurance, take a holistic view of your family’s financial situation to decide how much and what type of coverage you need.

If you’re looking for term life insurance quotes, NerdWallet’s comparison tool can help.

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @barbaramarquand.

Image via iStock.