Mortgage life insurance ensures your mortgage debt is paid in the event of your death. This prevents the foreclosure of your home, which is one of your major investments.
Mortgage life insurance has the following features:
Designed to coincide with the level of remaining mortgage debt. This may either be a level or decreasing life insurance coverage, depending on whether the mortgage is a repayment mortgage or an interest-only mortgage. To know all about choosing the right insurance depending on your mortgage, read these guides .
The beneficiary is the lender. The policy owner assigns the lender as the policy’s beneficiary. This means that you don’t have to worry about your beneficiaries deciding to spend the life insurance proceeds on other things and failing to pay for the mortgage. However, there may also be instances when the recipient of the life insurance is the family (such as the case of an endowment policy).
Coverage is for a specific number of years. The number of years of coverage is also designed to coincide with the length of the mortgage.
Simpler underwriting requirements. Since this is mostly issued as a group product and marketed by mortgage companies, the underwriting requirements are not as stringent as regular life insurance policies. It must also be mentioned that although there is minimal underwriting at the outset, there may be underwriting issues that affect your claim.
No cash-in-value. Standard mortgage life cover is a non-cash value, term life insurance policy. After it terminates and there are no claims within the coverage of the policy, there will be no forthcoming payments, unless you opt for a cashback mortgage life insurance. The exception is an endowment mortgage, which makes use of an endowment life insurance policy.
What insurance do I get if I have a mortgage?
Mortgage life insurance . This may be confused with other mortgage insurance products. Mortgage life insurance is not :
- Homeowner’s insurance. This covers any losses against the house and its contents. This means that when a portion of the house is destroyed by fire, the insurance will kick in to pay for the repairs, as well as for the loss of its use.
- Private Mortgage insurance. This protects against the borrower’s inability to pay for the mortgage. When the borrower defaults on the monthly payments due to death, disability or unemployment, mortgage insurance will step in to cover the remaining debt or to at least pay the mortgage payments for a number of months. PMI is primarily required by the lender to protect the loan they extended.
- Title insurance. This protects a new property owner from erroneous titles, which may result in losses or claims. This is more commonly sold in the United States than in the UK.
Types of mortgage life insurance
Mortgage life insurance can come in two types:
Decreasing Term Insurance.
The amount of insurance is scheduled to decrease in basically the same amounts as the mortgage debt decreases as you pay off your mortgage over time. By the end of the policy term, the amount of cover would have reached zero. This type of mortgage life insurance is best for a repayment mortgage. The
decreasing amount of cover makes this cover cheaper. Most decreasing term life insurance assumes a rate of 8% to 10%.
Level Term Insurance.
The amount of insurance remains the same over time. This is usually meant for interest only mortgages, where you only pay the interest during the length of the mortgage and repay the whole principal at the end of the mortgage.
You can strengthen the protection provided by your mortgage life insurance policy by option for the following add-ons:
- Return of Premiums Benefit. Although this will significantly add to your premiums, this provides a refund of all premiums paid upon the termination of the coverage.
- Critical illness benefit. This pays a specified amount when you are diagnosed with a covered critical illness. This enables you to pay even if you become critically ill and are unable to continue working.
- Mortgage Payment Protection. This pays for the monthly mortgage amortizations in the event that you get disabled, sick or unemployed. Know more about getting payment protection with your policy.
The cost of mortgage life insurance
Mortgage life insurance premiums are computed based on the following factors:
- Your age
- Your gender
- Your medical condition (and perhaps your family’s medical history)
- The amount of insurance coverage (often depending on the mortgage amount)
- Your smoking habit (or lack thereof). Smoking will result in higher premiums for you.
- The type of insurance selected. Premiums will vary depending on whether you have a decreasing term cover or a level term cover.
- The add-ons you opt for. You can choose to have the basic mortgage life insurance coverage or opt for riders/coverage such as Return of Premium rider, Critical Illness cover or Mortgage Payment Protection Insurance.
Buying mortgage life insurance
You can buy mortgage life insurance from your lender or from an insurance agent. Buying from your lender makes for convenience. You only have to make one payment for both the amortizations and monthly premiums. However, you may have savings if you buy from an independent insurance agency.
Although you usually will not need to undergo medical examinations when taking out a mortgage life insurance policy, it is important to remember to be honest in your answers to medically-related questions. This will help avoid any hassles or denial of your beneficiary’s claim.
Mortgage life insurance to strengthen your insurance portfolio
Some people say that a term life insurance can address any concerns about the mortgage – and give your family enough freedom to decide to spend the money the way they see fit.
However, a mortgage life insurance policy, which is designed to specifically cover the mortgage, will ensure that the insurance proceeds will go to pay off the mortgage. You can actually have a mix of life insurance to cover your mortgage and life insurance for the rest of your family’s needs – payment of other debts, payment of your end of life expenses, to fund your child’s education, to pay for the family’s everyday needs. That way, you secure your family’s future while also ensuring that they don’t have to face the prospect of foreclosure.