Mortgage life insurance is a form of insurance specifically designed to protect a repayment mortgage. If the policyholder were to die while the mortgage life insurance was in force, the policy would pay out a capital sum that will be just sufficient to repay the outstanding mortgage.
Mortgage life insurance is supposed to protect the borrower’s ability to repay the mortgage for the lifetime of the mortgage. This is in contrast to Private mortgage insurance, which is meant to protect the lender against the risk of default on the part of the borrower.
When the insurance commences, the value of the insurance coverage must equal the capital outstanding on the repayment mortgage and the policy’s termination date must be the same as the date scheduled for the final payment on the repayment mortgage. The insurance company then calculates the annual rate at which the insurance coverage should decrease in order to mirror the value of the capital outstanding on the repayment mortgage. Even if the client is behind on repayments, the insurance will normally adhere to its original schedule and will not keep up with the outstanding debt.
Some mortgage life insurance policies will also pay out if the policyholder is diagnosed with a terminal illness from which the policyholder is expected to die within 12 months of diagnosis. Insurance companies sometimes add other features into their mortgage life insurance policies to reflect conditions in their country’s domestic insurance market and their domestic tax regulations.
Based on the mechanics of the product, mortgage life insurance is a financial product which paradoxically declines in value as the client-borrower pays more premium to the insurer. In many cases, traditional life insurance (whether term or permanent) can offer a better level of protection for considerably smaller premiums.
The biggest advantage of traditional life insurance over mortgage life insurance is that the former maintains its face value throughout the lifetime of the policy, whereas the latter promises to pay out an amount equal to the client’s outstanding mortgage debt at any point in time, which is inherently a decreasing sum. Hence, mortgage life insurance is extremely profitable for lenders and/or insurers and equally disadvantageous to borrowers.
In addition, lending banks often incentivise borrowers to purchase mortgage life insurance in addition to their new mortgage by means that are on the verge of tied selling practices. Tied selling of a product of self or of an affiliated party, however, is illegal in most jurisdictions. In Canada, for example, this practice is explicitly forbidden by Section 459.1 of the Bank Act (1991).
Finally, mortgage life insurance is not required by law. It is up to the client-borrower whether he or she will opt to protect his or her property investment by an insurance product or not. Similarly, the choice of insurer is completely unrestrained as well.
Because of these suboptimal qualities of mortgage life insurance, the product has been subject to sharp criticism by financial experts and by the media across North America for over a decade. This has arguably led to fewer banks actively advertising this product in the recent years, although many still keep it in their portfolios. However, many critics fail to consider that in many cases where term life insurance is denied for health reasons, mortgage life insurance is still available (this does not guarantee that you are covered, but rather you’re allowed to pay the premium of the insurance, the financial institution holds the right to deny the claim. This is due to «post-claim underwriting,» meaning they check to see if you qualify for the coverage when you make a claim. This will lead to a refund of premiums and no coverage). As such, mortgage life insurance can cover the biggest expense left by a deceased breadwinner — i.e. housing costs. Thus, it is simplistic to dismiss it out of hand as disadvantageous to borrowers.
Private Mortgage Insurance
The term Mortgage insurance may in some contexts refer to Private mortgage insurance (PMI), also known as Lenders mortgage insurance. Private mortgage insurance protects the lender instead of the borrower, although its premiums are payable by the borrower. This type of insurance is compulsory in certain jurisdictions for mortgages started with low down payments.
In the United States, subject to Homeowners Protection Act of 1998, a borrower who provides less than 20% down payment up front may be required to pay for private mortgage insurance until the outstanding mortgage is less than 80% of the value of the property.
You probably already know you should think about life insurance if you have a mortgage.
What you don’t know is this…
There are two traditional ways companies have historically tried to sell you mortgage life insurance.
… but they’re both antiquated and expensive.
Don’t worry. We’re going to show you a better way!
One unique life insurance company has stepped up and developed a brand new custom solution to cover your mortgage life insurance needs. A cheaper and more effective way, one that will neither over or under insure you.
This you gotta see!
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How Much Life Insurance Do You Need for Your Home?
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Outdated Mortgage Protection Type #1
families should consider covering their homes with life insuranceOld-fashioned mortgage life insurance delivers a policy that starts with the full value of your mortgage and then declines as your mortgage balance decreases.
The good news is you are covered for the amount due on your mortgage as long as you don’t increase your mortgage with a home equity loan, that is!
…BUT it’s a very expensive option, AND you must continue to pay the same premium for the full amount of coverage as you will pay once the death benefit has been reduced over time.
We don’t want you to pay for coverage that won’t benefit you!
Mortgages inherently deal with death. The word “mortgage” comes from the Old French for “death pledge,” meaning that the loan expires after being paid in full; if it’s not paid, the property is taken and is “dead” to the owner. But what if your death pledge outlives you? Who pays your mortgage after you die? Nerd Wallet, What Happens to Your Mortgage When You Die?
State Farm Mortgage Protection Life Insurance Plan
State Farm is one of the few companies who still offers an old-fashioned Mortgage Protection Life Insurance plan.
For the first 5 years, the death benefit remains level, and begins to decline annually as your mortgage is reduced. It never goes below 20% of original benefit. Terms are available for 15 or 30 years, and premiums are scheduled to be level for the life of the policy.
Unfortunately, State Farm has to option to raise the premiums up to the maximum amount stated in the policy.
Hmmmm…now that doesn’t make me feel warm and cozy!
Did You Know?
Mortgage life insurance policies with decreasing benefits typically cost more than policies with level death benefits.
Sounds impossible, right?
It’s because most of them don’t require a medical exam. Many of these mortgage life insurance offers come via snail mail when a home owner purchases a new home or refinances their mortgage, and the no exam life insurance company vultures send out their offerings! Typically they cost more than guaranteed level term, but are easier to qualify for.
Show Me the Numbers
Let’s compare State Farm’s mortgage protection plan with their term coverage:
For a 44 year old male, in good health, a 30 year term Mortgage Life policy with declining death benefit costs $265.46/month or $3,051.50/year.
So, if this man were to die at age 70, the policy would only pay out $238,050.00 (not the full $575,000.00) and by that time, the premiums could be as high as $5,113/year!
So this is a very, very expensive policy!
Outdated Mortgage Life Insurance Type #2
It didn’t take the life insurance industry long to figure out that the traditional “mortgage life insurance” policy seen above, with increasing premiums, and decreasing benefits, could easily be beaten by a straight guaranteed level term policy.
… and that’s what MOST agents will sell you.
For example, if you have a 30 year mortgage, most agents will try to automatically sell you a 30 year term policy, whose death benefit stays level during the entire 30 years.
The benefits of Plan 2 are:
your death benefit doesn’t decrease
you get a longer fixed period of level premiums
Here’s an example.
Guaranteed Level Term Better, But Not Quite Perfect!
Compare State Farm’s mortgage protection plan above to State Farm’s Select Term policy with a level death benefit:
For the same 44 year old male, in good health a 30 year select term policy costs $149.94/month or $1,723.25/year.
So right off the bat, the policy is cheaper.
Next, if this man were to die at age 70, the policy would pay out the full $575,000 benefit, which would pay off that mortgage, AND provide additional financial benefits for his family.
That’s a great improvement over the cost and the death benefit of their old-fashioned mortgage protection insurance!
Case Study #2: 37 Year Old Man Needs to Cover a $500,000 Mortgage
Now, for a younger person, say a 37 year old non-smoker, male, preferred rating, with a $500,000 mortgage, we find that the old-fashioned policy for $500,000 America General Term policy for 30 years will cost almost $52/month for a total of $18,652 over the life of the policy.
However the Protective Mortgage plan would cost only $44.57/month for a total of $16,045 over the course of 30 years. Any way you slice it, the Protective Mortgage Protection plan is a winner!
How Much is Mortgage Protection Insurance Per Month?
If you want a quote from us for straight term, (old-fashioned type of insurance #2), please see our Life Insurance Rates by Age page, where we offer free ballpark quotes, with no personal information required.
However, if you’d like to protect your mortgage with our new Protective strategy, you’ll need to call us directly at 877-443-9467 for a customized quote, as our quoter is unable to handle these customized rates at this point.
You can also get the ball rolling by visiting our FREE QUOTE page, but keep in mind, that will also just give you a ballpark level term option. But at least that will get one of our agents to call you, who can give you a customized quote by phone.
Types of Mortgage Life Insurance
Let’s now take a look at some of the other options you may be exposed to if you go to another agency to protect your mortgage through life insurance.
It’s good to familiarize yourself with them so you can make an educated decision when you purchase your policy.
If you read the fine print, you will see that some policies only pay out if you die from an accident!
Your mortgage life insurance policy should be comprehensive, so your family isn’t literally left out in the cold if something happens to you!
Let’s check out some other types of mortgage protection insurance now:
State Farm Mortgage Life Insurance
No Exam Policy:
This policy is issued regardless of health. That’s helpful if you’ve have serious medical problems, but no-exam policies usually cost more, so if you’re healthy, you can get more coverage for less money by buying a medically underwritten policy.
The biggest drawback to this type of life insurance that doesn’t require an exam is it’s more expensive. Those who buy life insurance without the exam will be paying more than a traditional life insurance policy, in most cases. The life insurance company is taking on a bigger risk by not fully evaluating your health and makes up for that extra risk by charging more. Life Happens, Life Insurance with No Medical Exam Is It Worth It?
The Pros and Cons of No Exam Insurance
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Private Mortgage Insurance or Mortgage Insurance Protection:
Here is one big misunderstanding waiting to happen that could cost you your home!
Don’t be confused when your lender includes Private Mortgage Insurance as part of your conventional or FHA loan.
MANY OF THESE POLICIES INCLUDE LIFE INSURANCE ON THE BORROWER, BUT IT DOES NOT PAY THE BORROWER’S BENEFICIARIES. IT PAYS THE LENDER.
These are insurance policies that YOU pay for, but benefit only the lender. Your family receives nothing from these policies. When you are searching for mortgage protection insurance, make sure your family will be the beneficiary, not the lender!
… in other words, even if you have this type of mortgage insurance, you still need life insurance to protect your family so they can continue to pay the mortgage (or pay it off free and clear.)
Level Term Life Insurance:
Most agents are now selling level term life insurance policies to clients looking for mortgage protection.
… this was the second “old-fashioned type of mortgage life insurance” we discussed above.
This is not a bad solution, because it will provide enough coverage to pay off the mortgage should the insured die before it’s paid off. The excess death benefit can be used by the beneficiary for other needs and expenses at their discretion.
This policy does not decline, so the value of the purchase remains constant. So it is indeed a better choice than the old-fashioned mortgage protection insurance described above.
However, it may result in over-insurance, which can be costly if not needed. If the balance on your mortgage is only $14,242 when you die, and the death benefit is over $500,000, you may have been paying too much for more coverage than you need.
Mortgage Disability or Mortgage Unemployment Insurance:
There is nothing wrong with these policies, per se, but you should know they will not pay off your mortgage if you die. They only make your payments temporarily while you are unable to make them yourself. They do not take the place of a mortgage life insurance policy!
Mortgage Life Insurance from USAA, Allstate, and Geico
To my understanding, none of these companies offer life insurance for mortgages, at least not in the sense that State Farm does in outdated type #1.
Of course, they all offer term, so all of them are able to “cover a mortgage.”
USAA Mortgage Insurance
In searching USAA’s website for mortgage life insurance, I found nothing more than a page about term life insurance.
Allstate’s site has a video about paying for a home with life insurance, and a feature where you can customize the term length for the amount of years left on your mortgage. For example, you could buy a 23 year term policy.
… but this appears to be just another version of outdated type 2.
Does Geico Offer Life Insurance to Cover Mortgages?
No. In fact, Geico doesn’t offer any type of life insurance.
They do have an affiliate relationship set up with Life Quotes, Inc. though.