As a homeowner, you've probably received offers for mortgage protection insurance from your lender, through the mail, or from your insurance agent. But with different forms of mortgage insurance, how do you know what's best for you?
Types of mortgage insurance
There are basically two types of mortgage insurance. The first is private mortgage insurance which is required by lenders if the down payment for your home doesn't meet a certain threshold. It has nothing to do with death or disability and is meant to pay off your lender if you were to default on your loan. The premiums are paid by you, the borrower, and it's a product that's purchased through your lender.
The second is mortgage life insurance. Unlike private mortgage insurance, a mortgage life policy benefits you, the homeowner, by making sure your family's home is owned “free and clear” should either you or your spouse pass away prematurely or become permanently disabled and unable to work. The benefit is in knowing that your home loan will be fully repaid, and you won't have the worry about your family struggling to make mortgage payments or being forced to downsize.
What you need to know
First, mortgage life insurance is typically referred to as a decreasing term life policy. This means that as you repay your mortgage, the value of the mortgage life policy also decreases. Unlike a regular life insurance policy, mortgage insurance can't provide a fixed payout. You may start off with a $200,000 policy, but that payout will decline as your mortgage is paid down.
Second, it is the mortgage lender who is the policy's beneficiary - not your family. So when you die, the payout goes directly to the lender to repay the mortgage. Yes, your family benefits from having a mortgage-free home, but it won't leave them with any cash to use for other outstanding debts and immediate living expenses.
While you may like the idea of having mortgage protection, you may prefer not paying for insurance that leaves you with no control over where the settlement goes. In this case, you might consider term life, second-to-die or joint survivorship life insurance. These types of life insurance policies can ensure that your beneficiary has the funds to pay off the mortgage, as well as any other expenses he or she may have.
Many people today are considering term insurance as part of their mortgage protection plan. Insurers typically offer 25- or 30-year term policies that will allow you to cover the amount and length of your home loan.
First-to-die life insurance is another option for mortgage protection because it allows the full death benefit to be passed directly to the surviving spouse, giving him or her the opportunity to use the proceeds for paying off the mortgage, or whatever else he or she needs.
There are many additional life insurance options that are available to you when considering mortgage protection. To find what works best for you by speaking with a qualified insurance professional or financial adviser.