Purchasing a home is a significant financial commitment. Depending on the loan you select, you may be committing to 30 years of payments. But what happens to your house if you die unexpectedly or become unable to work?
Under certain conditions, there is a type of insurance that can assist your family in covering your mortgage – you can avoid foreclosure if you are unable to work to pay your mortgage. Your mortgage may be the largest loan you’ll ever take out. Some insurers promote this insurance as a way to avoid premature death.
Are you wondering about the type of insurance that pays off a mortgage? This article answers any questions you may have. It also provides the best insurance companies for this. In addition, we have added the reasons you should reconsider this type of insurance.
What Type of Insurance Pays off a Mortgage?
Mortgage protection insurance (MPI) is a type of insurance policy that assists your family in making monthly mortgage payments. It only takes action if you, the policyholder and mortgage borrower, die before the mortgage is completely paid off. Some MPI policies will also provide limited coverage if you lose your job or become disabled as a result of an accident. Since most policies only payout when the policyholder dies, some companies refer to it as mortgage life insurance.
The majority of MPI policies operate in the same manner as traditional life insurance policies. You pay a monthly premium to the insurer. This premium keeps your coverage current and protects you. If you die during the policy’s term, your policy provider will pay you a death benefit equal to a certain number of mortgage payments. The policy’s terms specify the policy’s limitations and the number of monthly payments it will cover.
Best Mortgage Protection Insurance Companies
There are several mortgage insurance. The ones on the list are based on product availability, consumer satisfaction, pricing, and features. The 2022 Best Mortgage Protection Insurance Companies are-
1. Banner Life– The best option for young families.
This is one of the best options for young families with financial concerns. This includes new home loans, small children, and even future babies, Banner Life term coverage can provide up to 40 years of dependable mortgage protection, earning our nod in this category.
- Term policies can last up to 40 years.
- A lot of states have it.
- Coverage of up to $10 million is available.
- Additional terms of up to 20 years
- Preferred underwriting can be gotten, despite having a medical or tobacco history.
- Only through an agent, you must purchase coverage.
- Addition of annual policy fee.
2. USAA– The best for veterans.
For this option, all eligible military veterans and their families are allowed to purchase life insurance from USAA. It is a highly rated carrier with a wide range of coverage options.
- The term, whole, and universal life insurance
- Veterans in retirement can replace SGLI and lock in premiums.
- There are numerous terms and riders to choose from.
- Almost all the 50 states in the U.S offer it.
- Coverage can be added or converted as needed.
- You require a medical examination.
- Only the eligible service members and their families are eligible.
3. State Farm– The best option for 30-year mortgages.
State Farm is our favorite mortgage protection life insurance carrier for 30-year mortgages because it will refund your decades’ worth of premiums if you don’t end up needing your policy.
- Excellent consumer feedback
- Premium refund offered
- Quotes are available online.
- Only through an agent, you can make a purchase
- Not available in every state
- Term lengths have limits.
4. Nationwide- The best option for 15-year mortgages.
We chose Nationwide as our preferred carrier to protect your 15-year mortgage because they provide affordable and dependable coverage with term-to-permanent conversion at any time during your policy.
- Benefits of term, whole, universal, and variable life insurance
- Convert to permanent coverage at any time without having to take a medical exam.
- It also offers quotes online.
- You must purchase through an advisor.
- Online quotes have limits.
5. Protective– Beneficial for Reverse Mortgages:
Protective receives our top recommendation for the best mortgage protection insurance for reverse mortgages because it makes it easier for older applicants to obtain the term protection they require at reasonable rates and with useful features.
- If you are 65 or younger, you can apply online for up to 20 years of term insurance with a no-cost terminal illness and accelerated death benefits.
- Riders and additional benefits
- Even older applicants can afford it.
- You require finalization with the agent
- You require a medical examination.
How mortgage protection insurance works
Mortgage protection insurance (also known as mortgage life insurance and mortgage protection life insurance) is a policy that pays off the remaining balance of your mortgage if you die. The banks and mortgage lenders sell it frequently.
Lenders like mortgage life insurance because they are the ones who get paid when you die. A standard life insurance policy’s death benefit is paid to the beneficiaries you specify. The beneficiary of a mortgage life insurance policy, on the other hand, is the lender, who will be paid the remaining balance of your mortgage.
As a result, your family will only benefit indirectly. If you owe $300,000 on your mortgage, the mortgage protection policy you took out will pay it off. This would make the property mortgage-free, but your family will have no say in how that money is disbursed. Since your mortgage balance decreases over time as you make payments, the death benefit of your mortgage life insurance also decreases.
What Are the Expected Costs of Mortgage Protection Insurance?
Even if you’re purchasing mortgage protection insurance to protect your home mortgage, numerous factors influence the cost of coverage. These include your level of coverage (the amount owed on your home), your age, your health, your location, and factors such as tobacco use or hobbies.
We discovered that a healthy woman in her early 40s could expect to pay between $20 and $45 for a month for term coverage worth $400,000 to $650,000 for 20 years.
Why do you need Mortgage Protection Insurance?
Since mortgage life payouts are not flexible, you are usually better off with a regular term policy with enough coverage to pay off your mortgage. When you die, your family has the following options:
- They can use the death benefit to pay off the mortgage and keep any remaining funds.
- Secondly, they can also choose to forego paying off the mortgage and instead spend the money on whatever they want — it’s their money, not the lenders. A mortgage life insurance policy obligates your loved ones to pay off the mortgage, even if they have other bills and needs that are more pressing.
- Thirdly, the most significant advantage of mortgage protection insurance is its convenience. It corresponds exactly to your mortgage balance, There is usually no life insurance medical exam required to purchase a policy.
- If you are denied term or whole life insurance due to medical reasons, mortgage life insurance may be an option to protect your home financially.
- Supplementing a personal life insurance policy. For example, if your mortgage is paid off with the proceeds of a mortgage life policy, your family can use the proceeds of your term or whole life insurance policy to cover bills and other expenses.
Why Mortgage Protection Insurance is not a Great Idea?
Even though mortgage protection insurance has its benefits, there are a few drawbacks as well. A term life insurance policy may be more cost-effective than a mortgage life insurance policy. You can customize your coverage amount and policy length with a term policy. Though you are not required to, you can align those options with your mortgage if you want to.
Some of the facts you should consider why mortgage protection insurance is not a good idea are-
- Cost: Since mortgage protection insurance is available to almost everyone, it is more expensive. Although you may not look forward to a medical review with an insurance company. Costs should be significantly lower, especially if you’re in good health. Guaranteed issue policies are priced to account for a subset of customers who are sicker and more likely to die with insurance.
- Control: The lender is typically the primary (or only) beneficiary of mortgage protection policies. If your only financial need is to pay off your mortgage, that’s fine. Other needs exist for most families and couples, and they may be higher priorities.
- Lack of adaptability. Even though the death benefit can alleviate the financial stress of mortgage payments, your family may still be swamped with bills and other debt that they cannot afford.
- Payout is decreasing. Even if your premiums remain constant, the payout amount decreases as you pay off your mortgage. And the premium is frequently much higher than the premium for term life insurance.
If you only want to focus on your mortgage, you should consider getting decreasing term insurance. Similarly, you can look for policies that allow you to change the death benefit and lower your premiums regularly. Inquire about each insurer’s willingness to be flexible.
Frequently Asked Questions
What kind of insurance is best for mortgage protection?
Policy on term life insurance A traditional life insurance product, such as a term life insurance policy, is typically the best option for mortgage protection for people in good health.
What are the most common types of mortgage insurance?
Borrower-Paid Mortgage Insurance (BPMI): You will pay mortgage insurance for the duration of your loan. Lender-Paid Mortgage Insurance (LPMI): Your lender pays your mortgage insurance, but you pay a slightly higher interest rate as a result.
What does PMI on a mortgage mean?
Private mortgage insurance, or PMI, is a type of mortgage insurance that may be required if you have a conventional loan PMI, like other types of mortgage insurance, protects the lender rather than you if you default on your loan.
Is PMI and MIP interchangeable?
The primary difference between PMI and MIP is that PMI applies to conventional loans while MIP applies to FHA loans.
The type of insurance policy offered by banks affiliated with lenders as well as independent insurance companies is termed Mortgage life insurance. However, it is not like other types of life insurance policies. Unlike traditional life insurance, which pays out a death benefit to your beneficiaries after you die, mortgage life insurance only pays off a mortgage when the borrower dies as long as the loan is still outstanding. This is a significant benefit to your heirs if you die with a mortgage balance. However, if there is no mortgage, there is no payoff.