Mortgage Protection Insurance Facts Every Homeowner Should Know

Mortgage protection insurance provides a benefit for your family or beneficiaries in order to payoff the mortgage insurance in the event of your death. You own the plan, which is typically a decreasing term insurance plan, and can either be assigned to the lender on a collateral basis, or up to the amount of money owed on the mortgage. Any excess amount would go to your family to provide an additional amount to meet any additional liabilities.

Not Credit Life or Primary Mortgage Insurance

Mortgage protection insurance is sometimes confused with credit life and primary mortgage insurance or PMI. Credit life is a form of protection issued by the lender or their insurance company affiliate that directly names the lender as beneficiary directly. The proceeds of the insurance go to pay off the mortgage and it protects the interests of the lender only.

PMI protects the lender against default risk for borrowers with a low loan-to-value or LTV ratio. When the down payment and initial mortgage payments constitutes a value in the home that is less than 80 percent LTV a lender will require PMI as a way to protect themselves and recoup their costs necessary to sell the home in the event of default.

Mortgage Protection Insurance Is Decreasing Term Insurance

Many companies offer mortgage protection insurance plans. It is important to understand that mortgage protection insurance is not a product but a way to use life insurance. The plans are decreasing term insurance policies issued by insurance companies, based on your life expectancy and other risk factors.

Decreasing term insurance provides a benefit that goes down annually over the term period. For mortgage protection, it works perfectly because as you pay off the loan balance, the face amount of the policy decreases until it is equal to $0 at the end of the mortgage, usually 15 to 30 years. Some companies may offer more expensive level or increasing term insurance policies that will give you an excess amounts over time, however decreasing term is more than adequate to meet your mortgage protection needs.

Options and Features of Mortgage Protection Insurance

You can add different additional features or options to your plan to meet your family’s needs. Once such option is the conversion option that allows you to convert the term insurance policy into a permanent plan, such as universal or whole life insurance. This can be valuable if you have insurance needs beyond the mortgage and wish to keep the protection in-force after the mortgage has been paid.

You can also include a disability waiver of premium rider that will pay premiums for you during the time that you are disabled and unable to work. This helps you maintain the decreasing term insurance protection, up to age 65, and know that if death were to occur before the mortgage has been paid that your family will remain in the home.

If you are considering mortgage protection insurance or have received some type of flyer or mailer stuffed in your bank statement, ask questions about the type of protection being sold. This will help you determine whether a mortgage protection insurance plan is right for you or whether you have adequate life insurance protection already in place to meet your mortgage and other expense needs.

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