What is Mortgage Protection Life Insurance?

Most have heard the term, but few understand exactly how it works. In fact, a 2010 survey of our clients found that just 1 out of 5 were aware of the pros/cons of mortgage protection life insurance. The circumstances which would make someone need this type of insurance are obviously something nobody wants to think about. However, people don’t want to think about getting into a car accident, or their kitchen flooding- yet most consumers have those insurance coverages. Plus there are lots of different insurance types in the mortgage business- some might think they are already covered.

Mortgage Protection Life Insurance is very simple. It is a policy that protects the person on the mortgage in case of death. Like any other insurance it is something nobody wants to think about claiming. In the event, the mortgage life policy will pay off the entire loan balance. Of course, comparisons to traditional life insurance must be made and some calculations should be done.

Mortgage Protection Life Insurance is NOT mortgage protection insurance. At the risk of being confusing, mortgage protection insurance is a different type of policy that protects the mortgage holder in case of loss of income, and pays a cash amount to help them make the payments. In fact, CAR has worked with the HFA(Housing finance authority) to offer a free year of mortgage protection insurance to qualified individuals. You do need to meet a few restrictions- contact us below to apply.

There are two types of mortgage life insurance coverage, depending on the kind of mortgage you have, a repayment(standard 30 year fixed, or FHA loan) or an interest only mortgage. There are two main types of mortgage life insurance cover, which are:

  • Decreasing Term Insurance  This type of insurance is designed for mortgages which are designed to be paid off- you make payments, and at some point the loan will be paid off. A decreasing term insurance policy will decrease along with your mortgage balance. This type of policy guarantees to payoff remainder of the mortgage and alleviate any additional worry to your family. Payment is only made should you die during the term of the policy(and mortgage). If the policy expires, it pays nothing if you are still living.
    • Main benefit: cost effective means of protecting your home and family during the term of your loan.
  • Level term insurance This type of mortgage life insurance is for loans where the principal balance stays the same for the entire term of the mortgage and payments cover the interest due only. This is commonly Interest-Only loans and Reverse Mortgage products. Unlike decreasing term insurance, coverage stays the same throughout the term of this policy, matching the principal balance on the mortgage. Payment is the same, only made if the insured party dies before expiration of the policy.

Note: There is no surrender value on either of these types. Both typically include aTerminal illness benefit and Critical illness coverage is typically an available option. In summary, both types of Mortgage Protection Life Insurance are good financial tools to aid estate planning. If you don’t currently have life insurance or are looking for extra security, Mortgage Protection Life Insurance might be a good thing to check out.