Life Insurance for Your Mortgage?

June 8, 2011

Many people have heard of private mortgage insurance, which pays your lender if you default on your mortgage, but what can you do to make sure your mortgage is paid off if you die?

One answer is mortgage protection life insurance, and it’s essentially just another kind of life insurance.

Originally, mortgage life insurance policies matched the amount of the mortgage balance, and as the balance decreased the amount of life insurance did as well. For most of us, however, it makes better sense to take out a mortgage life insurance policy equal to the original mortgage amount, but at the least expensive level term, rather than anything that decreases.

Alternatively, you can buy return of premium life insurance policies as a form of mortgage life insurance. These policies have more competitive rates and, if you keep the policy, all the premiums you’ve paid will eventually be paid back to you.

The most inexpensive form of mortgage life insurance, however, is a level premium/level benefit term policy. These policies are purchased for a specified period of time, during which the policy amount is guaranteed not to decrease and the premiums can be guaranteed not to change. Typical terms for these policies are 30, 20, or 15 years – the life of the average mortgage loan.

While mortgage protection life insurance is still sold by some banks and some agents, it’s probably a better idea to choose an insurance policy that will pay off your mortgage in case of your death, without having the insurance amount decrease, and with guaranteed lower rates.