What is Mortgage Protection Insurance?

How Does Mortgage Protection Insurance Work?

Mortgage protection insurance is an optional term insurance policy, where you pay fixed premiums for a set period of time—generally the same term as your home loan. The coverage amount is equal to your outstanding mortgage balance, which means that the death benefit decreases over time.

If you die during the coverage period, the insurance company pays out the death benefit to the lender. Once it's paid out, your loved ones no longer have to worry about making a mortgage payment. In some cases, you may also be able to add certain riders to your policy. For example, one add-on may cover your premium payments if you become disabled and cannot work—though it won't pay your mortgage.

You can typically only apply for mortgage protection insurance during the first two years of your mortgage loan's repayment term. However, some insurers may be willing to work with you for up to five years after closing.

It's important to note that mortgage protection insurance is not the same as standard mortgage insurance that some lenders may require. Standard mortgage insurance protects the lender in the event that you default on your loan.

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Mortgage Protection Insurance vs. Private Mortgage Insurance

Unlike mortgage protection insurance, private mortgage insurance (PMI) is typically required on a conventional loan if you put less than 20% down on your home loan.

Like other forms of mortgage insurance required on government-backed loans, it protects the lender in the event that you stop making payments. At that point, you'll typically enter foreclosure. The premium for PMI is based on your loan amount and may cost anywhere from 0.2% to 2% of your principal balance annually. That said, you can get it removed once you meet loan-to-value requirements.

In contrast, mortgage protection insurance is optional and pays off the loan, allowing your loved ones to remain in the home after you pass away. Your policy premium will be based on your age, loan amount and other factors.

Mortgage Protection Insurance vs. Life Insurance

Mortgage protection insurance is a type of life insurance, but it differs greatly from a standard term life policy. While both options cover you for a set period of time—usually with level premiums—the death benefit on a standard term policy remains the same instead of decreasing along with your mortgage balance.

What's more, you get to choose your beneficiary on a standard life insurance policy, and your loved ones can choose how they use the proceeds. For example, a surviving spouse may choose to pay off the mortgage loan, or they may opt to keep making payments and use the funds to pay funeral expenses, replace the deceased spouse's income, cover college costs and more.

That said, mortgage protection insurance policies don't require a medical exam. In some cases, you may not even need to fill out a health questionnaire. As a result, they may be more beneficial for homeowners with health issues that preclude eligibility for a standard life insurance policy.

How Much Does Mortgage Protection Insurance Cost?

Like traditional life insurance, the premium for a mortgage protection insurance policy will depend on a few factors, such as your age, gender, coverage amount and the insurer you choose. In some cases, it may also be based on your health.

However, because mortgage protection insurance often doesn't require a medical exam, you can generally expect to pay more than you would for a comparable term life policy, particularly if you're healthy. That said, the higher cost may be worth it—or even your only option—if you have medical conditions that make it difficult to get affordable term coverage.

Even so, it's crucial that you shop around and compare quotes from several insurance carriers to make sure you get the best deal.

Pros and Cons of Mortgage Protection Insurance

As you consider your situation and needs, it's important to understand both the advantages and disadvantages of mortgage protection insurance to determine if it's the right fit for you. Here's what to keep in mind.

Pros of Mortgage Protection Insurance

• Doesn't require a medical exam: If you have a medical condition, such as diabetes, cancer, heart disease or even obesity, you don't have to worry about it impacting your eligibility for coverage. In some cases, you may even qualify for a lower rate.
• Fixed premiums: A predictable premium throughout your policy's term makes it easier to budget for the cost of coverage.
• Peace of mind: Having coverage to pay off your mortgage loan can alleviate some of the financial stress your loved ones may experience after you pass away.

Cons of Mortgage Protection Insurance

• Typically more expensive: If you're generally healthy, you can expect to pay more for mortgage protection insurance than for a standard term life insurance policy with the same coverage amount.
• Decreasing coverage: While your monthly premiums stay the same throughout your policy's term, the death benefit is tied to your mortgage balance. As a result, you'll end up paying the same for less coverage over time.
• Limited purpose: As a form of credit insurance, its only use is to pay off your home loan, and the beneficiary must be your lender. If you want your death benefit to cover other potential needs—or you simply want your loved ones to have a choice in how they use the proceeds—consider a standard life insurance policy instead.

Should You Get Mortgage Protection Insurance?

Your lender can't require you to obtain mortgage life insurance, so it's up to you to decide if it's a worthwhile investment. To help you determine whether it's the right fit for you, here are some situations where it could make sense:

• You have insufficient assets to pay off your mortgage loan in the event of your death.
• Your health situation makes it impossible to qualify for a standard term life insurance policy.
• You can qualify for a lower premium on a mortgage protection insurance policy.
• Your top priority with estate planning is to pay off your mortgage loan.
• You're in the first few years of your mortgage repayment term.

On the flip side, here are some scenarios where it might not be the right decision:

• You have enough assets to cover your mortgage loan in the event of your death.
• You're generally healthy and can qualify for a lower rate with a comparable term life insurance policy.
• You prefer a whole life insurance policy for its lifetime coverage and cash value component.
• You want to provide more than a paid-off mortgage for your loved ones.
• You want to give your loved ones the flexibility to choose how they use life insurance proceeds.
• You're past the deadline based on your mortgage repayment term.

How to Get Mortgage Protection Insurance

If you've determined that mortgage protection insurance is right for you, here are some steps you can take to obtain a policy:

1. Consider your options. When closing on your loan, your mortgage lender may offer you a policy. However, you may also obtain coverage through a life insurance company or a private insurer that specializes in credit life insurance.
2. Get quotes. Reach out to a handful of different insurance companies to get quotes based on your age, mortgage balance and other factors. You'll typically need to provide some basic personal information, such as your name, date of birth, gender, ZIP code and contact information, plus your desired coverage amount and term length.
3. Compare policy options. Once you've obtained enough quotes, compare the rates and policy features to determine which one is right for you. For example, it may be worth it to pay a little extra if the policy offers certain riders that enhance your coverage.
4. Complete an application. After choosing a provider, you'll move forward to complete a full application. At this point, you may need to answer additional questions about your health, though that may not be required with some insurers.
5. Finalize your purchase. After submitting your application, you'll receive an offer from the insurance company. Carefully review the policy documents to make sure you fully understand what you're getting. If you're ready to proceed, you'll provide your payment details to set up your premium payments, then your policy will be in force.

The Bottom Line

Mortgage protection insurance can provide peace of mind, knowing your loved ones won't be stuck with monthly payments if you pass away. However, there are both benefits and drawbacks to consider before you apply, and in many cases, homeowners may be better off with a standard term life insurance policy.

Before you apply for mortgage protection insurance, take some time to evaluate your current situation and needs to determine which type of coverage is right for you. If you decide to purchase a policy, shop around and compare quotes and policy features before moving forward with an application.