What is Mortgage Life Insurance?

Definition of Mortgage Life Insurance

Mortgage life insurance is a life insurance policy that will pay off the remaining balance of the mortgage upon the policy holder’s death. It differs from traditional life insurance which pays a set amount upon the death of the policy holder. With mortgage life insurance, the face value of the policy, or the amount to be paid upon death, is the mortgage balance. Thus, unlike a traditional life policy, the face value of mortgage life insurance decreases over time as the mortgage balance decreases.

Example

Mr. McGillicuddy takes out of $200,000 15 year term, life insurance policy and dies in year 14 of the policy. Upon the death of Mr. McGillicuddy, the policy will pay $200,000 to the beneficiary.

Now if Mr. McGillicuddy has a $200,000 mortgage and takes out a mortgage life insurance policy. Mr. McGillicuddy dies 14 years after taking out the mortgage, which now has a balance of $125,000. The policy will pay the sum of $125,000 to the mortgage holder upon the death of Mr. McGillicuddy, completely paying off the mortgage.

Mortgage life insurance should not be confused with the mortgage insurance required on high ratio mortgages.

Mortgage life insurance is intended to pay off the mortgage on the death of the borrower whereas, mortgage insurance will compensate the mortgage holder if the buyer defaults.

Want to discuss insurance as it relates to your mortgage? Contact us!

Advantages of Mortgage Life Insurance

Mortgage life insurance provides a peace of mind for those who do not wish to leave their heirs with the burden of a mortgage upon their death. Because the mortgage life insurance is targeted for a particular purpose, the borrower does not have a fear that insurance proceeds will be directed elsewhere, leaving the mortgage unpaid. Mortgage life insurance is normally a group insurance policy where risk is spread across a large group of people.

Disadvantages of Mortgage Life Insurance

Because the mortgage balance will decrease over time, the insurance policy essentially becomes less valuable. The premiums however, remain the same. In many cases, a regular life insurance policy taken out in an amount equal to the outstanding balance will not decrease over time. Should the borrower die while the mortgage balance is low, a portion of the term policy can be used to pay off the mortgage balance, with the remainder of the policy proceeds used for other needs of the heirs.

At First Foundation, we will be happy to discuss your mortgage life insurance options to determine if it is the right thing for you. However as we have an entire Insurance Division, we will most likely connect you with an insurance professional to discuss all your needs!

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Last updated Nov 19, 2014