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Mortgage Life Insurance vs. Term Life: The Best Option for Homeowners
Mortgage life insurance pays off your home loan if you die, but term life gives your family more flexibility.
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Protect the people who depend on you
Life insurance provides those who depend on you financially with an important safety net.
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 is usually a better choice. Before you start shopping, it’s important to understand how term life insurance works and why it’s often better suited for mortgage protection. Here’s a look at the main advantages.
Term life lets you choose your coverage amount
With a term life insurance policy, you can buy enough coverage to meet all of your family’s needs — not just repayment of the mortgage. For example, you can choose a coverage amount that replaces your income, covers your children’s college tuition fees and pays for burial expenses.
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 gives your family flexibility
Term life pays a death benefit to any life insurance beneficiary you choose, such as your spouse or child, 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.
By contrast, the death benefit of mortgage life insurance typically goes directly to your lender, not your family.
Term life coverage can extend past your mortgage term
Many providers offer term life policies lasting between five and 30 years. Buyers can choose a term length for life insurance based on their longest financial obligation, and they are not bound to a specific length.
A mortgage life policy, however, coincides with the length of your home loan. Plus, some mortgage life policies end if you refinance.
Term life is typically cheaper for the coverage it offers
Term life is often cheaper for the amount of coverage you buy than mortgage life, especially if you’re healthy.
Most mortgage life insurance policies don’t require applicants to go through a life insurance medical exam. This may sound convenient, but you might 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.
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 life insurance you need.
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