After closing on a home, many homeowners start getting mail and calls about "mortgage protection." Some of it looks official, which can make it confusing. The short version: mortgage protection is a way of using life insurance to protect your home, and in most cases it's closely related to term life insurance. The differences are in how the coverage is sized, who gets paid, and what extras come with it.
What is term life insurance?
Term life insurance covers you for a set number of years, such as 10, 20, or 30. If you pass away during the term, the insurance company pays the death benefit to the people you name as beneficiaries. They can use the money for anything: the mortgage, everyday bills, childcare, college, or savings. Term life is usually the most affordable way to buy a large amount of coverage, but it has no cash value and ends when the term is over.
What is mortgage protection insurance?
Mortgage protection is life insurance chosen specifically to match your mortgage, usually in amount and length. If you pass away, your family has money to pay off the home or keep making payments. Most mortgage protection plans are term policies, though some are built on whole life or other permanent coverage. Some plans also offer optional riders, such as benefits if you're diagnosed with certain serious illnesses, or a return of premium feature. Availability and cost of riders vary by plan.
It's not the same as PMI
Mortgage protection is easy to confuse with private mortgage insurance (PMI), but they do very different jobs. As the Consumer Financial Protection Bureau explains, PMI protects the lender, not you, if you stop making payments, and it's often required on conventional loans with less than 20% down. PMI does nothing for your family if you pass away. Mortgage protection life insurance pays the people you choose.
One more thing to check: some "mortgage life" policies sold through a lender name the lender as the beneficiary. With the policies Matt compares, the benefit goes to your beneficiaries, and they decide how to use it.
Level vs. decreasing benefits
Mortgage protection policies are usually one of two types:
- Level benefit: the death benefit stays the same for the whole term. As you pay your mortgage down, your family would receive more than the remaining balance and could use the rest for other needs.
- Decreasing benefit: the death benefit shrinks over time, roughly following a mortgage balance. Premiums may be lower, but the payout gets smaller each year.
A regular term life policy is almost always level, which is one reason some families prefer it.
Side by side
| Mortgage protection | Term life | |
|---|---|---|
| Main purpose | Pay off or keep up with the mortgage | Replace income and cover any family need |
| Who receives the benefit | Your beneficiaries (check lender-sold policies) | Your beneficiaries |
| How coverage is sized | Matched to your mortgage balance and term | Based on your family's overall needs |
| Benefit over time | Level or decreasing, depending on the plan | Usually level |
| Common extras | Optional riders on some plans | Optional riders on some plans |
| Medical exam | Often health questions only; varies | Varies by amount, age, and insurer |
Which one makes sense for you?
There's no single right answer, but these situations come up often:
- Your main worry is the house. If you mostly want to make sure your family can stay in the home, a mortgage protection plan sized to your loan may be a simple, focused fit.
- Your family depends on your income for more than the mortgage. A term policy sized for your overall needs, such as replacing income for a number of years, childcare, or college, may cover more ground.
- You want both. Many families combine coverage: a policy that matches the mortgage plus additional term coverage for income, or a smaller whole life policy for permanent needs.
- You have health conditions. Different insurers view health differently. Comparing several companies can open up options you might not find on your own.
Questions to ask before you buy
- Who is the beneficiary, and can I change it?
- Is the death benefit level or decreasing?
- How long does the coverage last, and what happens when the term ends?
- Which riders are included, which cost extra, and what exactly triggers them?
- Is there a medical exam, or health questions only?
- If I refinance or move, does the policy stay with me? (Life insurance generally isn't tied to a specific loan, but confirm with your policy.)
Get help comparing
For Lake Norman homeowners and families across North Carolina, Matt MacMillan compares mortgage protection and term life options from multiple insurance companies and explains the trade-offs in plain English. Quotes are free with no obligation.
This article is general information, not a quote or an offer of coverage. Policy features, riders, and availability vary by insurance company and state, and all coverage is subject to underwriting.
Sources
- Consumer Financial Protection Bureau, What is private mortgage insurance?. www.consumerfinance.gov