Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Life Insurance

What it is:

Mortgage life insurance is an insurance policy which fully repays the balance of a mortgage in the event the borrower dies.

How it works (Example):

Mortgages have long-term horizons -- usually 30 years. Given such a substantial amount of time, a borrower could conceivably die before his or her mortgage is paid off. Mortgage life insurance behaves like a traditional life insurance policy in that it promises to make a single cash payment if the holder passes away. Rather than paying the sum of money to surviving beneficiaries, the insurance provider makes a direct payment to the deceased's mortgage lender to cover the total outstanding balance.

For example, if a policyholder dies with a $120,000 balance remaining on his or her mortgage, the insurance provider will pay $120,000 to the lender to fully repay the loan.

Given the diminishing nature of mortgage balances, insurance providers typically offer two mortgage life insurance plan options. One option, called decreasing term insurance, charges progressively lower premiums corresponding with decreases in the balance of a policyholder's mortgage as time goes on. The second option, called level term insurance, follows a traditional premium structure and offers the same benefits each year.

Why it Matters:

Mortgage life insurance ultimately protects a policyholder's heirs from losing their home. It should be noted that if a policyholder dies following the full repayment of a mortgage, the insurance provider makes no payment even though the policy may still be active.