New homeowners often get solicitations for mortgage term insurance. Here's what you need to know.
Getting a homeowner’s insurance policy to protect your home isn’t just a smart investment – mortgage lenders will require sufficient insurance to safeguard their collateral. But what about protecting your family from mortgage-related financial woes in the event that you pass away?
When you close on your home loan, you’ll likely receive offers from insurance companies for mortgage term insurance, a product geared toward covering your mortgage payments if you die before paying off your home.
Before you sign up for a mortgage term insurance policy, be sure you understand what mortgage term insurance is, how it compares to other life insurance products, and the pros and cons associated with this type of insurance.
Mortgage term insurance—also known as mortgage protection insurance—is a life insurance product that specifically covers your mortgage payments in the event of your death. These are known as “term” policies because they only pay out if you die within a set period of time, typically 15 or 30 years.
The aim of mortgage term insurance is to ensure that your family won’t lose the home if they’re unable to make the monthly payments after you die.
This can be especially important if you’re the primary or sole breadwinner in your household, or if your mortgage payments are high enough that it would be impossible for your surviving spouse or children to cover the payments on your own.
Some policies pay out in the amount of your initial mortgage balance, while others pay out only the remaining balance at the time of your death.
Mortgage term and term life insurance are similar in structure.
You choose a term (usually between 15 and 30 years for mortgage coverage) during which you pay a set premium amount for coverage. If you pass away during the policy term, your beneficiary receives a benefit payout. Aside from this structural similarity, these are two very different products.
Mortgage term insurance benefits can only be used to pay off your mortgage, while term life policies don’t usually include restrictions on how these benefits are used after pay out.
In the case of a mortgage term policy, the lender, not your surviving family member, is the beneficiary of the policy. Mortgage term policies can be costlier than other life insurance products, although rates vary by provider and other factors.
The answer here depends on the stipulations of your specific policy, but there are a couple common scenarios.
Some insurers allow consumers to convert mortgage term policies into term-life policies after the sale or early payoff of the insured mortgage. Or your policy may be transferrable to a new mortgage that you acquire during the policy term, assuming the initial mortgage has been paid in full.
Generally, homeowners may find that mortgage term insurance is a costlier, more restrictive product than most other life insurance products.
That being said, there are a few scenarios in which mortgage term insurance might be the right choice for you. If you’re excluded from term life policies due to medical conditions, mortgage term insurance could make sense as an alternative.
Even if you think your health could be a deal breaker when it comes to getting a term life policy, it’s worth asking around.
You may be surprised to find a company willing to offer you coverage that is a more comprehensive and flexible option than a mortgage term policy.