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Your Bank > Education and Advice > CNB University

Mortgage Life Insurance

C Spaker
Christopher R. Spaker, AMP is President, CNB Mortgage Company and can be reached at CSpaker@CNBank.com or 585-385-2370 x50955.

 Purchasing a home is often times the single largest financial investment a person makes in his or her lifetime and taking out a mortgage can be a scary proposition. Now imagine if the principal wage earner dies. How will the mortgage payments be made?

Mortgage Life Insurance, also referred to as Mortgage Protection Insurance, covers this potential financial disaster. A policy can be purchased when you first purchase your home, or later if you think your situation warrants it.

The whole idea behind Mortgage Life Insurance is pretty straightforward. You pay a premium which remains constant for the duration of the policy. Should you die during that time, the insurance pays off the rest of your mortgage. The borrower pays for the coverage, but if the loan is defaulted, the lender is the policy's beneficiary.

Just like any other type of life insurance, the insurance companies take age, whether the applicant is a smoker or non-smoker, and the value of the death benefits into account.

The "death benefit" in this case is the outstanding balance on your mortgage. As you pay your mortgage down, the amount your policy pays off goes down as well. Even so, your policy premiums remain the same because the payments were initially calculated with the decreasing death benefit in mind.

If you make extra payments on your mortgage, your beneficiary could receive some of the "death benefit" from a mortgage insurance claim. The death benefit remains the amount your mortgage would be , if you were only making the required payments. This means after the mortgage is paid off, your family would receive the remaining death benefit.

While policies vary from one insurance company to another, if you should default on your mortgage, most insurers will give you a grace period and extend your coverage.

If you refinance your mortgage, you can usually get your mortgage life policy reissued at a more favorable premium.

Also available is Mortgage Life Insurance which provides joint coverage for you and your spouse. This policy pays off when either you or your spouse dies. The pricing can be more advantageous than what you'd pay for two individual term life policies but keep in mind the decreasing benefit.

There are alternatives to mortgage protection insurance

The downside to mortgage protection coverage is the death benefit pays only your mortgage balance, and perhaps a bit more if you paid additional principal on your mortgage. With a term life insurance policy however, your beneficiaries have much more flexibility.

Finding a term life policy to cover a mortgage below $100,000 can be difficult, as few term life policies are available for such a low benefit but because term life isn’t priced according to your mortgage balance, you can still take out a $100,000 policy for the same premium you would probably pay for a mortgage life policy.

Don't confuse Mortgage Life with Private Mortgage Insurance

If you've purchased a home with less than 20 percent down, your lender probably required you to purchase Private Mortgage Insurance (PMI.) While mortgage life insurance will pay off your loan when you die, PMI only covers a portion of your loan if you default. PMI is designed to reduce the risk faced by lenders, when homebuyers have less than 20 percent for a down payment. Unfortunately, some people continue to confuse Private Mortgage Insurance with Mortgage Life Insurance. Private Mortgage Insurance puts people in homes; mortgage life insurance takes them out. It pays all or a portion of your mortgage balance in the event of your death. And while PMI might make it easier for you to get a loan, you need mortgage life or another form of life insurance to guarantee your loan is paid off should you die prematurely.

One question I hear quite often, "is Mortgage Life Insurance really worthwhile?" In my opinion, life insurance that will cover your mortgage balance in the event you die is probably worthwhile. Mortgage life insurance has a decreased value over time where a simple term life policy will pay out the full amount. My recommendation is a term life policy but you should speak to a life insurance agent and make that determination for yourself.