How Life Insurance Protects a Mortgage

By Cynthia Garcia

Buying a house is a major financial decision. Depending on the state where you live, the prices are skyrocketing, making home ownership almost impossible for the average American. With this, most people will turn to a mortgage loan. 

While a mortgage can be a lifesaver, it can also be a burden. When you die, there are typically two options – the guarantor will repay the loan or the lender will cease the property. Either way, it will be a liability to the loved ones you will be leaving behind. For your peace of mind, life insurance that protects your mortgage is worth considering. 

What is life insurance? How can it protect your mortgage? Is it worth the money? Read on and find out!

What is Life Insurance?  

In a nutshell, life insurance is an agreement between the policy owner and insurer guaranteeing the payment of a specific amount to the stated beneficiaries upon the death of the insured individual. In exchange, the policyholder will pay a premium for a set period or a lifetime. 

From repaying a conventional mortgage to settling business loans, your life insurance can provide your loved ones with the means to reconcile your financial obligations. This way, you will not be giving them a nightmare once you are gone. 

While life insurance can help you prepare for the uncertainties that can confront you in the future, it is not enough. You need other types of insurance. For instance, health insurance is a must-have. Shop Medicare plans with Assurance and discover how you can minimize healthcare costs through private insurers. This can be a great accompaniment to your life insurance for a more financially secure future. 

What Happens To Your Mortgage when you Die? 

Mortgage is from the Old French word morgage. The latter translates to “death pledge.” 

When you die, the mortgage does not instantly go away. The lender must be repaid of the remaining balance. Otherwise, the lender has the right to recoup or foreclose the property if the financial obligations are not met. 

If you have a cosigner or co-borrower in the loan application, the latter is the one who will be responsible for continuing the loan payments. Otherwise, the estate executor is accountable. If there is insufficient liquidity or funds, the heir will inherit the mortgage. In such a case, the heir can continue paying the lender or arrange foreclosure. 

One thing is clear – the mortgage does not die with you. So, it can end up being a financial burden to your loved ones. 

How Does Life Insurance Protect Your Mortgage? 

Whether it is for residential or commercial real estate mortgages, life insurance can be beneficial. The main goal of life insurance is to fill a financial gap that could come up when you die. It will provide money that will cover the immediate and future needs of your family. Depending on the amount of the benefit, it can also be enough to cover your mortgage. 

While your family can use the insurance money straight away to settle the remaining mortgage balance, they are free to use it however they want to. For instance, they can spend it on any other investment they believe will have a significant yield. This way, they will have the money for mortgage payments while having income from the investment as well. 

While there are different types of life insurance available, if your goal is mortgage protection, the best option is term life insurance. In a nutshell, it is a policy that lasts for a specified period, such as five, ten, or 30 years. You will be paying premiums only within the specified coverage. At the same time, the benefits will expire within this period. If you outlive the policy, there is an option for extension, but the premium payments can be higher.

What is Mortgage Life Insurance? 

Mortgage life insurance, also known as mortgage protection insurance, is another option if you want to guarantee payments for a mortgage even after you die. It will pay for the outstanding balance. It is often sold by the bank or mortgage lender but can be also purchased from unaffiliated insurers. 

The biggest selling point of mortgage life insurance is that it provides peace of mind to your family. They will have an assurance knowing that the burden of paying a mortgage will not rest on them. It is guaranteed to be paid off when you die if you meet the terms and conditions of the policy. 

Another good thing about mortgage life insurance is that it is guaranteed approval without the need for a medical exam. Even if you are in a poor state of health, you can apply for this insurance. One of the instances when a mortgage life insurance is beneficial is when you have pre-existing conditions. In the case of the latter, you will have a hard time getting approved for life insurance or your premiums will be high. 

Nonetheless, it also has drawbacks. The most significant con of mortgage life insurance is that it lacks flexibility. It will pay off only the mortgage, and hence, your family cannot use it for anything else. 

The shrinking coverage can also be a problem. As the balance on the mortgage declines, the payout will also decline since it is directly proportional to the mortgage. 

Life Insurance vs Mortgage Life Insurance: What is the Better Option? 

Now, you are probably wondering, what is a better option for protecting a mortgage? Below, we will have a quick comparison of life insurance and mortgage life insurance to help you decide. 

• Beneficiary 

One of the main differences between the two is the beneficiary. In life insurance, you will decide who will be the beneficiary. You can even change the beneficiary in the policy. On the other hand, in mortgage life insurance, the beneficiary is the lender. This means that the party that has extended the mortgage is the one who will receive the payout upon your death. 

• Flexibility 

Because the beneficiary of mortgage life insurance is the lender, it is not flexible. Life insurance is better in terms of flexibility because your family can use them for any purpose they deem fit. Aside from the mortgage, they can also use it for repaying cash loans, starting a business, paying for tuition fees, and other essential expenses. 

• Duration 

Depending on the type of life insurance, the duration of the repayments can vary. Term life insurance can be fixed for a specified period, such as five or 30 years with the option to extend if you want to. Permanent life insurance, on the other hand, will require payments throughout your lifetime. 

In contrast, the duration of mortgage life insurance is tied to the loan payments. Once the loan has been repaid, the insurance ends. Depending on the policy, it can also end once you opt for refinancing. 

• Premiums 

The premiums will vary from one insurer to another and depending on the specific inclusions. In most cases, term life insurance is cheaper, especially considering the amount of coverage compared to mortgage life insurance. 

• Age Limits 

Like with premiums, the age limits can be different depending on the policies of the insurer. Most of the time, life insurance is less restrictive in terms of age limits. Some insurers will let you apply for a policy even when you are old. In contrast, a mortgage insurance policy is quite restrictive, making it more difficult to apply once you are old. 

• Underwriting 

In mortgage life insurance, most applicants do not need to go through a medical exam, which makes it convenient. However, this privilege also often comes with a cost. In life insurance, there is a medical exam, which means that the insurers will know more about the potential risks that you carry. 

How Much Life Insurance Do You Need? 

There is no general rule when it comes to the specific amount of life insurance that you should carry. Most financial experts recommend having insurance that is 10 to 15 times your annual income. 

However, you need to factor in the amount of the mortgage that you have, making sure that your family will have sufficient financial resources for their other needs. From tuition to living allowances, consider other things that will contribute to your family’s long-term expenses. 

In Closing 

Overall, life insurance is a worthy investment for mortgage protection. This will make sure that your loved ones will not have to suffer from the need to continue mortgage payments when you die. More so, this means that the property will not be at risk of being recouped or foreclosed by the lender. 

There is an alternative worth considering – mortgage life insurance. However, the policy is specific to paying the mortgage when you die. This way, your family will not be able to use the benefit for other financial needs.