Mortgage Life Insurance

Published on :

21 Aug, 2024

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Mortgage Life Insurance, also known as Mortgage Protection Insurance (MPI), refers to a mortgage-linked insurance policy bought by a mortgage borrower to cover their loan. Its purpose is the payment of monthly mortgage loan installments to the lender even after the death of the borrower so that their family can stay in the mortgaged home without difficulty.

It comes bundled with the mortgage loan in many banks, facilitating the loan's safety to the lender and giving the borrower's family peace of mind. Its application process tends to be quite easy. It is a low premium program as the risk spreads to a large group of borrowers. One can utilize the money obtained from other insurance towards other necessities.

What Is Mortgage Life Insurance?

A mortgage life insurance policy is an insurance policy associated with a mortgage loan that covers the loan with decreasing premium, allowing the payment of the remaining mortgage loan to the lender if the borrower dies.
It helps in mortgage loan protection for the borrower, ensures a safe stay for the borrower’s family, and relieves the tension of unpaid loans for the lender.
The difference between life insurance and mortgage insurance crops from the fact that the former covers the whole life of the borrower, whereas the latter covers only the borrower's mortgage loan.

Mortgage Life Insurance Explained

Mortgage life insurance protection is the life insurance that comes with the protection of a mortgage loan in case the borrower or insurance holder dies. These insurances come with a 30-day window period during which an insured may cancel the policy. It acts as a powerful force to stop the house bought from a mortgage loan from slipping out of the family's possession. The policy makes the lender the only beneficiary, which means that after the borrower dies, the family member of the deceased can claim no money, and only the lender has the full right to the insurance amount.

The mortgage protection life insurance premiums remain the same during the entire tenure of the mortgage loan, while the policy's value decreases with the decreasing mortgage loan. The borrower must buy the policy when buying the home from the mortgage loan. The length of the mortgage loan becomes the policy's length. Mortgage lender sells this insurance to the borrower either themselves or through their insurance partners. Moreover, buying an MPI from a lender ensures that the premium immediately goes into the loan after the borrower's death.

If the borrower dies, or gets permanently disabled, rendering himself jobless, the policy gets active, and the remaining amount is paid by the insurance policy amount. And the house bought on the mortgage remains in possession of the borrower. Furthermore, if a person wants to cover their family and the mortgage loan from insurance, then one may buy a standard term life insurance of the face value of the mortgage loan. One can use a mortgage life insurance calculator to know the amount paid for mortgage life insurance UK or America from their banks' website.

Examples

Let us look at a couple of examples to know more about it.

Example #1

Suppose Alex takes a mortgage loan from the bank of $400,000 at a 5% interest rate for 30 years to purchase a home. Alex's banks make him buy mortgage life insurance worth $400,000 with 30-year periods to cover the mortgage loan of $400,000.

If Alex dies 15 years after getting the mortgage loan and related insurance, there will be a sum of $ 250,000 left as the mortgage balance for payment. Therefore, the mortgage insurance would become activated, and the insurance policy would fully pay the remaining mortgage balance of $250,000. Hence, Alex's family would get a permanent cover over their head even after his death, and the mortgage loan would be fully repaid.

Example #2

Let us assume that Elliot is 50 years old and has no home to call own. Therefore, they approach the bank to take out a mortgage loan to buy a home for themselves and their family. As Elliot is already sixty years old, the bank makes Elliot buy mortgage life insurance to cover the mortgage loan. Just after five years, Elliot suffers a heart attack that makes Elliot leave his job and rest for the rest of the life.

In such a case, Elliot's mortgage insurance becomes active, and the insurance company pays the remaining mortgage amount to the bank. And the loan is closed, leaving Eliot's family with a permanent home.

Pros And Cons

Here are the main pros & cons of mortgage life insurance:

Pros	Cons
It does not require any medical examination to purchase the life insurance policy.	The death benefit keeps on decreasing with the decreasing mortgage principal.
It provides mental peace and tranquility that one's family would have a roof over their head in case the borrower dies or becomes unable to work.	It gets to benefit the lender instead of the mortgage borrower.
The death of a borrower does not necessarily require it to become active but even when one becomes disabled or ill or not able to work, then also becomes active.	The cost of keeping the insurance increases with time as the premium remains the same, but coverage keeps decreasing.
The mortgage borrower has no control over where the life insurance settlement goes after the insurance term is complete.	The cost of keeping the insurance increases with time as the premium remains the same but coverage keeps decreasing.

Mortgage Life Insurance vs Life Insurance

Let us go through the main differences between the two:

Mortgage Life Insurance	Life Insurance
It covers the mortgage balance of the mortgage loan of the borrower.	It covers the life insurance of the policyholder.
The coverage amount decreases with each passing year of the mortgage loan	The coverage remains the same for an insured during the entire policy period.
It ends with the closure of the mortgage loan.	Mortgage closure does not affect it.
It gets provided through the lender providing the mortgage loan to the borrower.	It gets obtained by the insured by the insurance provider directly or through its agent.
One does not require any medical test t be passed for the borrower to get insured.	It requires mandated medical tests to be passed before getting insured.
It becomes easier to apply and get insured under this method.	Medical history is required for it to be obtained by any applicant.
One does not require any medical test to be passed for the borrower to get insured.	No medical history is required to apply and get insured here.
Its total amount insured does not exceed the mortgage loan amount.	The sum insured can be of any amount.
The lender becomes the sole beneficiary of the insurance.	Any family member can become the beneficiary.
Only for accidental death does this become active.	For any death, the insurance becomes active.

Frequently Asked Questions (FAQs)

1. How much is mortgage life insurance per month?

Mortgage life insurance works by making the lender the main beneficiary of the policy so that in case the borrower dies without clearing the dues of the loan, the lender might use the policy amount to clear the remaining of the due mortgage amount. The amount of mortgage life insurance depends on the insured's health condition and mortgage. However, an average number of mortgage life insurance users pay $30-$150 per month.

2. Is mortgage life insurance worth it?

Yes, it is worth it when the FHA or USDA processes the housing loan. It allows the lender to provide loans to those applicants that may not have been eligible without it. However, for others, it might increase the cost load on their loans.

3. Is mortgage life insurance mandatory in Canada?

No, Canada has not mandated mortgage life insurance for every mortgage borrower. However, only when the down payment falls below twenty percent, it becomes mandatory for the borrower to register for it.