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Mortgage Life Insurance for Homeowners With Medical Issues

Mortgage Life Insurance for Homeowners With Medical Issues

If you go through the process of applying for a mortgage, you may be offered mortgage life insurance by your lender or its partner companies. While it isn't mandatory, mortgage life insurance offers enough coverage to pay off your mortgage so your family will not have to move if you pass away.

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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 with limited medical issues will get better quotes and greater coverage options with term life insurance. On the other hand, if you have severe health problems and won't qualify for term life insurance, then mortgage life insurance will offer larger death benefits than many alternatives.

What mortgage life insurance covers

Mortgage life insurance, or mortgage protection insurance, refers to a set of life insurance products that are designed to pay your outstanding mortgage balance if you die. This coverage is often offered by your bank or mortgage lender, but you can also purchase it through unaffiliated insurers. Since so many parties offer mortgage life insurance, the structure and benefits can vary significantly.

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 three 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. If your coverage amount is higher than your outstanding mortgage balance at the time of your death, your family will not receive any 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 not pay out if you die from natural causes, such as cancer or a heart attack. We don't recommend this type of coverage unless your family will be able to handle mortgage payments without you given two or three months' preparation.

Depending on the provider, mortgage life insurance 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. And since life insurance quotes are tied to your age, this will mean a higher premium.

A mortgage protection policy that's bundled into your mortgage is even more restrictive, as you can't choose to cancel your coverage if it becomes unnecessary. For example, say you bought a policy to make sure your spouse could keep the home after your death, but you later get divorced. You would have to continue paying 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 and are significantly cheaper — especially if you're relatively healthy and a nonsmoker.

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

Term insurance
Mortgage insurance
Coverage amountAny amountMortgage principal
Coverage length5-35 yearsMortgage length
Beneficiary Your choice Mortgage lender
Death benefit paid...Upon your deathUpon your accidental death
UnderwritingHealth questions and medical exam Health questions

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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.

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 term life insurance 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 err on the side of caution by assuming you're higher risk and raise their rates accordingly.

However, mortgage life insurance is a great alternative if you have pre-existing medical conditions that prevent you from getting traditional term insurance.

Life insurance policies with limited underwriting, such as simplified issue or guaranteed acceptance policies, regularly restrict death benefits to $100,000 to $250,000. While this payout could replace your income or pay for college tuition, it's probably not enough to also cover your mortgage.

Other mortgage-related insurance policies

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 either covers your entire mortgage balance or just a percentage of it.
  • Mortgage unemployment insurance: If you are unemployed for a period of time, this policy helps cover your payments.
  • Private mortgage insurance (PMI): If you get a mortgage and put down less than 20%, your mortgage lender may require you to buy private mortgage insurance. PMI protects the lender in case you default on the loan, but you can cancel coverage once your loan-to-value reaches 80%.

Frequently Asked Questions

When is mortgage life insurance a good idea?

Mortgage life insurance makes sense if you have any health conditions that could make term life insurance overly expensive. While the benefits will go entirely to your mortgage lender rather than your surviving family, mortgage life insurance is ideal if your main goal is to make sure your home loan is paid off no matter what happens to you.

Is mortgage protection the same thing as life insurance?

Yes and no. Like life insurance, mortgage protection policies pay out a benefit when the policyholder dies, but the beneficiary is always the mortgage lender — not your family or some other beneficiary who you designate. It's helpful to consider mortgage protection as a limited type of life insurance with more specific rules about who and how much is paid by the policy.

What's the difference between mortgage protection and private mortgage insurance?

Mortgage protection is an optional purchase that guards you against the possibility that you might not be around to pay off your family's mortgage. Private mortgage insurance (PMI) is a coverage that lenders require when your down payment is below 20%, and it protects the lender in case you default.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.