Mortgage Life Insurance: Good Rates for Homeowners with Medical Issues

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During the process of obtaining a mortgage, you will likely be offered mortgage life insurance, either by your lender or affiliated companies. Mortgage life insurance offers enough coverage to pay off your mortgage in case you pass away, so that your family will not have to move. If you’re not interested in coverage, don’t worry, life insurance is not necessary in order to obtain a mortgage.

If you are interested in getting life insurance to cover your mortgage, whether mortgage life insurance is the right policy for you depends primarily on your health. Young homeowners that have limited medical issues will get better quotes and greater coverage options with term life insurance. On the other hand, if you have severe enough health problems to not qualify for term life insurance, mortgage life insurance will offer larger death benefits than many alternatives.

Mortgage Life Insurance Coverage

Mortgage life insurance, or mortgage protection insurance, refers to a set of life insurance products that are designed to pay your outstanding mortgage balance in the case you pass away. This coverage is often offered by your bank or mortgage lender, but can also be purchased through unaffiliated insurers. Since so many parties offer mortgage life insurance, the structure and benefits can vary significantly and it’s important to check the terms of each policy individually.

Mortgage life insurance policies have a specified period of coverage, generally 15 or 30 years, and the death benefit can be structured in one of 3 ways:

  • Decreasing: The death benefit may be fixed for the first few years of coverage, but then decreases at a specified rate over the life of the policy. This is meant to mimic the rate at which the mortgage is paid off.
  • Mortgage Principal: Some policies tie the death benefit to the outstanding mortgage principal. This will behave similarly to a decreasing death benefit but, if you pay off your mortgage faster or slower than expected, the policy will reflect that.
  • Level: The death benefit will remain the same over the life of the policy. This may be ideal if you have an interest-only mortgage, since the principal remains the same.

Restrictions of Mortgage Life Insurance

Unlike term life insurance, mortgage life insurance typically pays the death benefit directly to your mortgage lender. So, if you have a greater amount of coverage than the size of your outstanding mortgage balance at the time of your death, your family would not receive the excess payout.

In addition, some mortgage protection policies will only pay a death benefit if you die from an accident, similar to accidental death insurance. If this is the case, your policy would pay out if you died in a car or plane crash, but not if you passed away from cancer or a heart attack. We wouldn’t recommend this type of coverage unless your family would be able to handle mortgage payments entirely given 2-3 months of preparation.

Depending on the company selling you mortgage life insurance, the policy may be tied to your home or bundled as part of the mortgage. If the policy is tied to your home, you would need to get a new policy if you moved later on. This would mean higher premiums since insurance quotes are tied to your age. A mortgage protection policy that’s bundled into your mortgage is even more restrictive, as you can’t choose to cancel your coverage if you don’t need it. For example, say you bought a policy to make sure your wife could keep your home, but you later get divorced, you would continue to pay for an unnecessary benefit.

Term Life Insurance vs Mortgage Life Insurance: Which is Best for You?

Term and mortgage life insurance policies have several similarities, but term policies offer much greater flexibility in their benefits. Term life insurance policies are also significantly cheaper if you’re relatively healthy and a non-smoker.

Some of the key differences between term life insurance and mortgage life insurance are:

FeatureTerm Life InsuranceMortgage Life Insurance
Amount of CoverageAny amountMortgage principal
Length of Coverage5-35 yearsMortgage length
BeneficiaryYour choice (child, spouse, etc)Mortgage lender in most cases
Death Benefit Paid Upon...Your deathYour accidental death
UnderwritingHealth questions and medical examHealth questions (often no medical exam)

We recommend term life insurance over mortgage life insurance if you’re in good health because you’ll get cheaper quotes and the death benefit goes to the beneficiary you choose. That way, if there are more pressing expenses at the time of your death or your family decides not to keep the house, they can use the full payout however they choose.

Mortgage life insurance quotes are more expensive for healthy homeowners because most policies don’t require you to get a medical exam prior to purchase. Therefore, mortgage life insurance companies have to assume you’re higher risk and raise their rates accordingly.

However, this also makes mortgage life insurance a great alternative if you have pre-existing medical conditions that prevent you from getting traditional term insurance. Pre-existing medical conditions, such as heart disease or diabetes, can often cause shoppers to be turned down for fully underwritten term life insurance. And life insurance policies with limited underwriting, such as simplified issue or guaranteed acceptance policies, regularly restrict death benefits to be less than $100,000 to $250,000. While this amount of coverage may assist your family with income replacement or the cost of college, it’s not enough to also cover the average mortgage.

Other Insurance Policies Related to Mortgages

Aside from mortgage life insurance, there are a few additional policies you may hear about when obtaining a mortgage. These may be offered separately or some may be bundled, but the terms of each are quite distinct:

  • Mortgage Disability Insurance - If you become totally disabled, this policy covers your mortgage payments. Coverage can be for the entirety of the payment or just a percentage.
  • Mortgage Unemployment Insurance - Similarly, if you become unemployed for a period of time, this policy helps to cover your payments.
  • Private Mortgage Insurance (PMI) - If you get a mortgage for over 80% of your home’s value, your mortgage lender may consider you to be high-risk and require that you pay for private mortgage insurance. This policy protects your lender in case you fail to make payments.

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