When you begin purchasing major investments, it's necessary to begin planning how to protect them. Estate planning is essential, regardless of your age. For married couples, the surviving spouse generally inherits the home. Unfortunately, a mortgage isn't forgiven with death. If the spouse wants to keep the home, she'll need to pay the mortgage, or she could lose the home. Mortgage life insurance is an insurance policy that pays off the mortgage in the event of the policyholder's death.
Both spouses don't need to be on the mortgage to qualify for mortgage life insurance. If there's only one spouse listed, he can purchase a policy designed to protect his spouse or heirs from the mortgage burden. Only the parties listed on the mortgage can purchase a mortgage life insurance policy. The policy only pays if the insured spouse passes away. If your spouse helps make the payment, but stayed off the mortgage due to credit blemishes or a high debt-to-income ratio, he might want to consider purchasing a traditional life insurance policy. Beneficiaries can use life insurance proceeds to pay the mortgage, funeral expenses or other debt.
How It Works
Lenders offer the opportunity to purchase mortgage life insurance when you close on the loan. If you decline, you'll likely receive offers in the mail from the lender or an insurance company affiliated with the lender. You won't have to pass a physical to qualify for coverage. You aren't excluded from coverage even if you have documented pre-existing conditions. Some mortgage life insurance policies have the option of adding a disability rider: If you become disabled, the insurance will provide monthly income to help cover the mortgage payments for a specified period of time.
In most cases, the beneficiary of the policy isn't your spouse or family members. The sole beneficiary is the mortgage lender. Your beneficiaries receive the home without having to take money out of the estate to pay off the loan. The benefit can't be applied toward other debts, only the mortgage. Mortgage life insurance policies remain in effect until the mortgage is paid. Even though the premium stays the same, the coverage declines as you repay the mortgage. The maximum payout is never more than the amount remaining on your mortgage.
Private Mortgage Insurance
Mortgage life insurance is commonly confused with private mortgage insurance. Unlike mortgage life insurance, private mortgage insurance is sometimes mandatory. In general, private mortgage insurance is required by the lender if your loan exceeds 80 percent of the sale price. If you put down at least 20 percent and have a decent credit score, you usually don't have to worry about the added insurance. The insurance protects the lender's interest in the home. If you default, the insurance company pays the lender.
- Bankrate.com: Do You Need Mortgage Protection Insurance?
- CNN Money: Does Mortgage Insurance Make Sense?
- Fox Business: Do I Need to Buy Mortgage Life Insurance?
- Consumer Financial Protection Bureau: What Is Private Mortgage Insurance? How Does PMI Work?
- State Farm: Term Life Insurance -- Mortgage Life
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.