How Mortgage Life Insurance Works: Pros and Cons

Insurance, Life Insurance
Mortgage Life Insurance

Your home is one of the biggest investments you’ll ever make, which is why families carrying a mortgage often need life insurance. If one of the breadwinners dies, a life insurance payout can help the family keep up with mortgage payments and stay in the home.

Mortgage life insurance, also called mortgage protection insurance, can be a way to pay off a mortgage, but it doesn’t take the place of regular life insurance.

How mortgage life insurance works

As the name implies, mortgage 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 payout goes to the mortgage lender, not your family. The payout matches your mortgage balance, so the potential payout amount decreases over time.

» MORE: How much life insurance do I need?

Pros

The biggest benefit of mortgage life insurance is its convenience. There often is no life insurance medical exam required to buy a policy.

If you’re denied term life insurance or whole life insurance because of medical conditions, mortgage life insurance may be an option to financially protect your home.

Mortgage life coverage also can 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.

Cons

Mortgage life insurance has limited advantages and serious drawbacks.

The biggest downside is the declining payout. Even though your premiums stay the same, the payout amount keeps decreasing as you pay your mortgage off. And that premium often is much higher than what you’d pay for term life insurance.

Some people argue that mortgage life insurance helps the lender more than your family because the bank gets the money if you die, not your beneficiaries. While the payout can take away 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, a family can use the payout for the most pressing bill, whether it’s mortgage payments, other loans or college tuition.

Term life insurance, in particular, can provide more bang for your buck than a mortgage life insurance policy. A term life policy allows you to choose a policy amount and length that matches the duration of the debts you want to pay, such as 10, 20 or 30 years.