Mortgage Protection Insurance: What It Covers and When It Makes Sense
How mortgage protection insurance works, what it costs, and when it’s actually useful in a financial plan.
Your home is a major investment, and you can protect that investment with home insurance. But if you pass away and your beneficiaries can't pay your mortgage, your home could be sold or foreclosed on.
Mortgage protection insurance offers you extra reassurance by paying off your mortgage after your death. Some policies also offer riders that extend coverage to pay your mortgage if you become disabled and can’t work.
Mortgage protection insurance can provide you peace of mind and may make sense for many homeowners, but it's important to understand how this insurance works and its drawbacks to decide if it’s right for you.
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How mortgage protection insurance works
Mortgage protection insurance is an optional policy that's designed to pay off your mortgage balance if you die during the coverage period.
The coverage is equal to your outstanding mortgage balance, and you’ll typically pay monthly premiums for a term that matches your mortgage loan term. The monthly premiums stay the same for the life of your insurance policy, but the benefit amount shrinks over time as you pay down your mortgage.
Mortgage protection insurance usually covers the principal and interest portions of your mortgage, but other expenses like property taxes and HOA dues are excluded.
If you pass away, your mortgage insurance will pay off your remaining mortgage balance, so your family doesn’t have to worry about that expense. Your family will still be responsible for those excluded expenses, like property taxes.
While mortgage protection insurance is typically designed to pay off your mortgage if you die, some policies allow you to add riders that expand coverage.
A disability rider may cover your mortgage payments if you become disabled and are unable to work. A job loss rider can help cover your monthly mortgage payment for a limited time if you involuntarily lose your job.
Mortgage protection insurance vs. private mortgage insurance
Mortgage protection insurance is easily confused with private mortgage insurance, but these policies function differently. Mortgage protection insurance is an optional coverage that protects you and your family by paying your mortgage balance if you pass away.
Private mortgage insurance works differently, protecting your lender if you default on your loan. In most cases, lenders require private mortgage insurance if you put less than 20% down on a home, and this coverage isn’t optional.
Mortgage protection insurance vs. traditional life insurance
Both mortgage protection insurance and traditional life insurance take effect after you pass away, but they work differently. Mortgage protection insurance is more limited than a traditional life insurance policy, and it pays only your mortgage. The funds go to your mortgage lender, not to your beneficiaries.
Traditional life insurance provides a benefit directly to your beneficiaries after your death. Your beneficiaries can then use that benefit however they choose, including to pay the mortgage, to cover home repairs or to pay for funeral costs and other expenses. In some cases, you can even use your life insurance benefits while you're alive.
Life insurance is generally more flexible than mortgage protection insurance, and it may be more affordable to get. However, some life insurance policies require a medical exam, and if the exam reveals health issues that make you a higher risk, you may be charged higher premiums.
Mortgage protection insurance doesn’t require a medical exam, which can be helpful if you don’t qualify for traditional health insurance or if you have a condition that means you’ll pay higher premiums.
Pros and cons of mortgage protection insurance
Like any insurance product, mortgage protection insurance involves trade-offs between cost, coverage and flexibility.
To decide if mortgage protection insurance is right for you, it’s important to understand its pros and cons.
Pros
- No medical exam required: Since you don’t need to have a medical exam to get this coverage, mortgage protection insurance might be the only option if you have health issues that make it difficult to get traditional life insurance coverage.
- Premiums are predictable: Your mortgage protection insurance premiums stay the same for the life of your policy. These predictable premiums make it easy to budget for your insurance.
- Peace of mind: Knowing that your home will be paid off if you pass away can give you and your beneficiaries valuable peace of mind.
Cons
- Higher cost: Mortgage protection insurance costs more than an equivalent life insurance policy for healthy buyers.
- Declining benefits: Since mortgage protection insurance pays off your mortgage balance, the policy’s benefits actually decline as you pay off your mortgage each month. Though the benefits shrink, you’ll still pay the same monthly premium.
- Limited usage: The benefits can only be used to pay the mortgage, and they’ll be paid directly to your mortgage lender. Your family can’t use the benefits for any other purposes.
Who should consider mortgage protection insurance?
Mortgage protection insurance may make sense depending on your situation. If your beneficiaries will inherit limited assets to cover the mortgage after you die, mortgage protection insurance can help pay for this major expense. It could help your family to be able to remain in your home without having to worry about the mortgage.
This coverage can also be an appealing option if you don’t qualify for affordable life insurance. While it’s more limited than a life insurance policy, mortgage protection insurance can still help you to cover the expense of your home’s mortgage for your beneficiaries after your death.
You might also choose mortgage protection insurance simply because you want to ensure that your heirs aren’t burdened with a mortgage payment. Ensuring your home will be paid off can help reduce their stress during a highly emotional time.
Alternatives and smart shopping tips
Carefully consider whether mortgage protection insurance or another type of insurance might be better for you. Term life or permanent life insurance might make more sense if you’re in good health and can qualify for low rates, as well as if you know your beneficiaries will need funds to pay for other expenses, like funeral costs, after your death.
Remember that mortgage protection insurance is optional, and lenders cannot require you to purchase this coverage. It’s up to you to decide whether this type of policy makes sense.
As you shop, take the time to get quotes from multiple providers. You may want to get quotes for different riders, too, which can extend your coverage so that it applies to different situations, like if you’re disabled and can’t work.
Be sure that you completely read the policy terms and that you understand any exclusions before you choose which policy is right for you.
Explore and compare some of today's top home insurance offers with the tool below, powered by Bankrate:
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