What is 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. This kind of life insurance is generally provided to you through your mortgage lender, although there are independent mortgage life insurance companies, such as Manulife’s Mortgage Protection Plan, which First Foundation offers.
How Does Mortgage Life Insurance Work?
Mortgage life insurance is designed to pay off your mortgage in the event of death. It functions as a declining balance – as you pay down your mortgage, your insurance payout decreases; the payout to the bank will equal the balance of your mortgage at the time of death. Despite the declining balance, your premium stays the same throughout the amortization period of your mortgage. Also, even if you have a mortgage insurance policy for both you and your spouse, it pays out for the first person who passes away.
How is my life insurance premium calculated?
Like any other insurance policy, you pay a monthly premium that is based on your age and state of health, but it differs in that the premium also takes into account the amount of your mortgage. That being said, mortgage life insurance applications don’t always ask detailed questions about your state of health.
Mortgage life insurance may be a group policy, so many clients of a “type” will be under one specific policy, which gives a less personalized insurance product and/or premium. Some forms of mortgage life insurance can be a good product for smokers (who are considered riskier clients by regular life insurance providers) because creditors don’t generally ask whether someone is a smoker or not. They also don’t ask for in-depth information about your medical history, so someone with a pre-existing health problem could still qualify for mortgage life insurance. The only catch is that the person with the pre-existing health condition would have to survive past the first twelve months of the policy (so one year after the policy comes into effect). Otherwise, the insurer could deny any payout.
Many mortgage lenders offer mortgage life insurance however these products may be more limited than an independent policy. Product features such as portability from lender to lender and portability from home to home may be missing. In addition, a lender's mortgage life policy may be underwritten at the time of claim, as opposed to the time of application, which increases the potential of a denied claim.
There are many factors to understand when choosing the appropriate life insurance - that’s why First Foundation is here to help guide you through the process.