If you own a house, it is likely to represent the largest investment you have ever made, and it might be your largest asset. But your house is more than just a financial entry on your balance sheet; it's your home. You want to make sure it's secure for your family in the event of an untimely death. Mortgage insurance is one option, but you need to understand the provisions of the policy before you sign on the dotted line.
Private Mortgage Insurance
Chances are, when your mortgage company refers to mortgage insurance, it's talking about private mortgage insurance, or PMI. This is an insurance policy your mortgage company might require if you made a down payment of less than 20 percent of the price of the home. PMI does not protect your family in the event of your death. It protects your mortgage company in the event that you default on your loan. Don't confuse private mortgage insurance with mortgage life insurance. They're not the same thing.
Mortgage Life Insurance
Mortgage life insurance is a decreasing term life insurance policy that lists your mortgage company as the beneficiary. The amount the policy will pay out in the event of your death deceases in tandem with the balance on your mortgage. If you die, the policy pays the benefit to your mortgage company, paying off or significantly reducing the balance owed.
Mortgage life insurance policies can be more expensive than other types of insurance, in part because they're typically issued without regard to the insured's health. Policy provisions can vary widely depending on the issuing insurance company. Your policy might only cover accidental death. It might cover only one spouse, or it might cover both. It might only pay off if both spouses die. Read the fine print and know the provisions of the policy before you agree to it.
Mortgage Insurance Alternatives
Mortgage life insurance is a specialized type of term life insurance that can be quite restrictive in its provisions. You might be better off purchasing a level term life insurance policy that is large enough to cover your family's financial needs in the event of your death. A regular term insurance policy allows you to name a person, such as your spouse, as your beneficiary. This gives your spouse the flexibility to use the proceeds from the policy to the greatest advantage, which might or might not include paying off your mortgage.
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