An Overview of Mortgage Life Insurance

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Mortgage life insurance pays the balance of the mortgage on your home if you should die before it's paid off. It sounds like a great way to protect your surviving family, but as with any insurance, you should do some research and explore various options. For example, it may be a more sound financial decision to purchase a term life insurance policy that pays money directly to your beneficiaries. Your decision should be based on the actual needs your survivors will face. In some circumstances it may make sense to keep the mortgage in place and invest the death benefit or use it to pay other expenses.

Before a company issues a mortgage life insurance policy, they review your age, health, where you live, and whether or not you smoke. Prices vary according to these factors and the amount of your mortgage. It's important to note that the mortgage life insurance policy takes into account the decreasing mortgage due. The insurer calculates how much the amount due decreases each year. Your monthly premiums will stay the same and when you die the policy pays the balance due the lender. If you buy a $200,000 mortgage life insurance policy and only owe $100,000 when you pass away, the policy will pay the $100,000 balance. If you've made extra payments and your pay-down is ahead of schedule, most companies will reimburse the difference.

Another mortgage insurance, PMI (Private Mortgage Insurance) works differently. Lenders require a PMI policy of borrowers that put less than a 20% down payment on their home in order to protect themselves against loss. If the homebuyer dies, the insurance company pays the balance of the mortgage to the lender. Federal law allows the insured to request cancellation of their PMI policy when their equity equals 20% of the original price. It requires that the lender allow them to cancel when the equity reaches 22%. Appreciation doesn't affect these transactions; policies and premiums remain based on the actual price the buyers paid.

Insurance policies, like mortgages, get more creative every year. Mortgage life insurance may fit your circumstances perfectly now, but that may change in time. It's a good idea to review your various policies each year and make changes as needed. You can get more information online and/or from your insurance agent or broker to help you determine what makes the most financial sense for you and your family.