Mortgage protection insurance is a life insurance policy that is designated and used to pay off your mortgage in the event of your death. It typically provides coverage for the same amount of time as your mortgage. Subsequently, if you take out a mortgage for 15, 20, or 30 years, your mortgage protection insurance policy needs to be the same or longer than your mortgage.
If you should die during the term of your insurance policy, your insurance company pays the death benefit directly to your beneficiary who can then pay off the mortgage. It’s important to note, however, your beneficiary can use the death benefit for any reason they choose, so it’s critical that you and your beneficiary agree on using the death benefit to pay off the mortgage.
You can also assign the insurance policy to your lender as their interest appears. In this scenario, the insurer would pay the lender the balance of the mortgage and the beneficiary would be paid any funds that are left over. This type of insurance does not cover your monthly payments if you cannot work due to a short or long-term disability.
In almost every situation, Term Life Insurance is used for the insurance coverage because it is the most affordable product available.
As we mentioned above, term life insurance is the most affordable insurance product to use for mortgage protection and term insurance can be purchased with very large face amounts very easily.
In the past, insurance agents would offer a Decreasing Term Policy where the benefit would decrease each year as the mortgage was paid down. This made sense because it was considered much cheaper for the policyholder.
Today, however, the cost for a level term policy (benefit stays the same) and the cost of decreasing term insurance is generally the same, or at least within a few dollars, so agents nowadays typically use level term insurance to cover the home mortgage. This way if you were to die late in the policy term, there would be a substantial amount of money left over for your beneficiary after paying off the mortgage.
Most term life insurance policies are designed to pay a death benefit only. They do not build cash value like whole life insurance, and they are not flexible like universal life. The good news is, however, the times have changed.
Most insurers now offer several riders (optional coverage) that will allow the policyholder to broaden their coverage and create a more comprehensive life insurance policy. All companies do not offer the same riders, so it’s important you check with an independent agent to make sure they have a policy that will meet your needs. The following riders can broaden your coverage and offer living benefits:
1. Accelerated Death Benefit: This rider has become one of the most popular riders available. In fact, many companies have added it to their core coverage at no extra charge. The rider provides for the insurer to advance the insured a large portion of the death benefit if they are diagnosed with a terminal illness and expected to die within a year. When the insured does pass away, the amount that was advanced is deducted from the policy’s death benefit and then paid to the beneficiary.
2. Disability Income Rider: The disability income rider is another very popular option because it is a living benefit. This rider provides for the insurer to pay the insured a monthly benefit in order to help replace lost income as a result of a disability. Many companies differ on the benefit amount and the maximum benefit so be sure and speak with your agent.
3. Critical Illness Rider: This rider is similar to the accelerated death benefit rider accept the advance on the death benefit is triggered by the type of illness rather than the expected death of the insured. The illnesses covered depend on the insurer, so once again check with your agent for specifics.
4. Term Conversion Rider: Although normally built into newer policies, the term conversion rider allows the policyholder to convert all or a portion of your term insurance to permanent insurance like whole life or universal life without having to prove insurability. This is a big deal if you want to turn your temporary insurance into permanent insurance after you’ve developed some medical conditions.
5. Return of Premium Rider: This rider actually converts your cost of insurance from an expense to an investment. The return of premium rider provides for the insurer to return all the premiums paid on your policy if you outlive the policy term. This refund is paid in a tax-free lump sum to the policyholder and can be used to supplement your retirement plan or for any other reason you choose.
Depending on your insurance company, there are several other riders available as well. Speak with your independent agent to discover which rider best meet your needs.
If you move from your current home to another home with a larger mortgage, your policy will still provide the coverage because your insurance covers you, not your home. If your current mortgage protection insurance is not sufficient to pay off the new larger mortgage, simply purchase some additional insurance to cover the difference. When the new mortgage is reduced to the amount of the old policy, you can cancel the new one or keep it in force.