With the purchase of a home comes the responsibility of making regular mortgage payments. And if you’re the primary breadwinner, your family depends on your income to help make these mortgage payments.
Unfortunately, this also means if for some reason you are no longer providing an income to your family (due to job upheaval, disability, or even death), your loved ones might struggle to manage the mortgage payments for your home.
None of us like to think about the unfortunate events in life, but the truth is tragedy can strike any of us at any time. Although we can’t control the unexpected we can certainly be prepared for it.
One way to protect your home and your family in the event of your death is through mortgage protection life insurance.
What is Mortgage Protection Life Insurance?
Mortgage protection life insurance is a term life insurance policy specifically designed to protect your mortgage should you die during the term of the policy.
For example, if you have a 30-year mortgage you can purchase a 30-year term mortgage protection life insurance policy that covers the amount owed on your mortgage. This ensures your family will be able to pay off your home and continue to live there after your lifetime.
Generally, there are two types of mortgage protection life insurance policies:
- Decreasing term insurance: The size of the policy decreases with the outstanding balance of the mortgage until both reach zero.
- Level term insurance: The size of the policy does not decrease.
The Difference Between Mortgage Protection Life Insurance and Private Mortgage insurance
Although they sound similar, mortgage protection life insurance is not the same as private mortgage insurance.
Private mortgage insurance is a policy issued by an insurance company that benefits your lender. If you are unable to make your mortgage payments your home might go into foreclosure. If your home goes into foreclosure and your lender is not able to recoup the outstanding balance by selling the home, the insurance company that issued the private mortgage insurance will pay your lender the difference.
Private mortgage insurance goes to the lender if you default on your mortgage. It doesn’t have a specific benefit for you as a borrower while a mortgage protection life insurance policy protects you as a borrower by paying you a cash amount to repay your outstanding mortgage.
Do You Really Need Mortgage Protection Life Insurance if You Already Have Life Insurance?
If you already have a life insurance policy when you buy your first home, it’s important to take a look at what type and how much coverage you have as well as how much the home purchase increases your coverage needs.
In a traditional life insurance policy, your family would receive a death benefit if you die, however, in a mortgage protection life insurance policy, your family only receives a death benefit if you die while the mortgage is still in existence.
If you already have a whole life or universal life policy, you may want to add a mortgage protection life insurance policy. You can carry both policies at the same time, and while your mortgage protection policy will expire, your whole or universal life policy will protect you for the duration of your life.
Adding a mortgage protection life insurance policy to your existing whole or variable life insurance policy adds an extra level of coverage. This ensures your family has the necessary money to pay off the mortgage in addition to the death benefit from the other policy to help with other financial needs.
When your home is paid off and you no longer need a policy to protect it, you can let the term policy expire and retain the other coverage as a death benefit for your family.
Before buying a mortgage protection life insurance policy you should carefully consider all factors of the policy. This is where an insurance agent can be a valuable resource. They can help you understand the language in your policy, explain the specific terms and conditions, and guide your decision around which mortgage protection life insurance policy is right for you.