NEW YORK, Nov. 30, 2021 (GLOBE NEWSWIRE) -- Life insurance can provide loved ones with the financial protection they need if the policyholder were to pass away unexpectedly. For those that own a home and have a mortgage, mortgage protection life insurance may seem like a good option. This type of policy will pay off the mortgage to the lender in the event of the policyholder's death.
But before deciding on mortgage protection life insurance, it's smart to consider the coverage it offers and other options that may be available. Read on to learn how mortgage protection life insurance works, the pros and cons, and alternative options in order to find a life insurance policy with the right terms and coverage.
What is mortgage protection life insurance?
Mortgage protection life insurance is a type of term life policy that will pay the death benefit to the policyholder's mortgage lender if they pass away while the policy is in force. Although policyholders' loved ones won't directly receive the payout, this policy will cover the mortgage payment in the event of the policyholder's death. Mortgage protection life insurance is often in place for the duration of the mortgage's term, and term lengths can range up to 30 years.
Sometimes confused with private mortgage insurance, which lenders require people to purchase if their down payment is less than 20%, mortgage protection life insurance is an optional policy.
Pros and cons of mortgage protection life insurance
Here are some benefits of mortgage protection life insurance:
Covers the policyholder's mortgage: Mortgage protection life insurance can ensure that the policyholder's mortgage gets paid off in the event of their death. This can alleviate some of the stress that loved ones may face during a difficult time period.
No medical exam: With mortgage protection life insurance, the policyholder is typically not required to take a medical exam to qualify for the policy.
Mortgage protection life insurance also comes with some drawbacks, such as:
Limited payout options: Since the payout from mortgage protection life insurance will only be used for paying the mortgage in full, loved ones won't be able to use the death benefit for bills or other types of debt.
Decreasing payout: Policyholders' payout amounts will go down as they pay off the mortgage. This means that even though they are still paying the same premiums each month or year, the payout will continue to decline to match the mortgage loan balance.
Alternatives to mortgage protection life insurance
Although mortgage protection life insurance is one way policyholders can provide financial security for their family, there are other options people can consider that may offer more benefits and flexibility:
Term life insurance: Term life insurance is a temporary policy that allows people to choose their policy length and coverage amount. This type of life insurance comes with lower premiums than mortgage protection life insurance, and the policyholder can choose who they want to be the beneficiaries. Additionally, loved ones can use the payout from this plan to cover any expenses they need. Policyholders that want more flexibility may want to consider getting a term life insurance plan.
Permanent life insurance: Permanent life insurance gives policyholders coverage for their entire lifetime, and has similar advantages to term life insurance when it comes to choosing beneficiaries and offering flexibility with how loved ones can use the death benefit. Policyholders should keep in mind that permanent life insurance can be more expensive than mortgage protection life insurance, so they should make sure this type of plan makes sense before applying.
The bottom line
Mortgage protection life insurance can provide the benefit of paying off the policyholder's mortgage to the lender if they pass away. But for those that want more flexibility with the death benefit and the option to designate their loved ones as the beneficiaries, term or permanent life insurance may be better suited for their needs. To get more information on life insurance options, people can speak with a trusted financial advisor to help them make an informed decision.
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