What Is Mortgage Life Insurance?

In this article...
  • Read about how mortgage life insurance works and the types of policy terms that are available. This article discusses who can benefit from this type of insurance.

Mortgage life insurance, also called mortgage protection insurance, is life insurance that pays off the policyholder's mortgage after death. These policies don't offer any payment beyond the amount owed on the designated mortgage at the time of the insured's death. This life insurance shouldn't be confused with private mortgage insurance (PMI), a type of insurance that protects lenders, not borrowers.

How Does Mortgage Life Insurance Work? 

Mortgage life insurance pays the amount still owed on the policyholder's mortgage at the time of their death. There is no payment beyond the amount owed on the mortgage, and many policies pay the mortgage lender directly. The insured's family can remain living in the home without worrying about making the mortgage payment, but they won't receive any additional funds from the policy. Purchasers of these policies aren't required to undergo a life insurance medical exam. 

Many mortgage life insurance policies are declining payout policies. The potential policy payout decreases as the amount owed on the mortgage goes down. The reduction happens because the policyholder pays off the principal owed on their mortgage over time. The life insurance policy will only pay the amount still owed on the mortgage. 

Other mortgage life insurance policies are known as level term insurance. These don't decrease because there is an expectation that the policyholder isn't paying down their mortgage. Level term policies may be available when the insured is making interest-only payments on their mortgage. 

Some policies only cover accidental death, so they offer no benefit if the insured dies from a health-related cause like cancer. Others pay the benefit for broader reasons. Some policies offer riders that will provide the policy amount if the insured is diagnosed with a terminal illness (usually defined as a life expectancy of fewer than 12 months). 

Is Mortgage Protection Life Insurance Worth It? 

For many life insurance buyers, mortgage life insurance may not be worth the cost. Term life insurance is usually a better value for those who qualify for it. 

One problem with declining payout policies is that the policy's value actually goes down as more premiums are paid (since the policyholder is also paying off their mortgage). Another problem is post-claim underwriting, which means that the insurance company doesn't fully evaluate whether the insured qualified for the policy until after a claim is made. If the company decides that the insured didn't qualify, they will refund the premiums but will not pay off the policyholder's mortgage. 

However, mortgage life insurance may still be a good choice for some people since no medical screening is required. People who wouldn't pass a medical exam or are too old to purchase a term life policy may be able to provide something for their family through a mortgage life insurance policy. These policies can ensure that loved ones remain in a family home and aren't left responsible for the mortgage. 

What Is the Average Cost of Mortgage Life Insurance? 

The cost of mortgage protection insurance depends on the amount of the mortgage and policy terms. Riders that provide for a policy payment in the event of terminal illness can increase the premiums. 

Banks and insurance companies that offer mortgage life insurance don't often publicly list prices, so getting rates can be difficult. Rates can range from $30 to hundreds of dollars per month. People hoping to purchase mortgage life insurance may need to request quotes to get an idea of what this type of insurance would cost.