People generally buy a house by obtaining a mortgage. In return, the lender expects to receive both principal and interest payments. The house, which functions as collateral for the lender, will revert to him in case of default. Mortgage life insurance is designed to pay off the remaining mortgage balance on the house in case of untimely death of the person responsible for making regular payments. In other words, a person buys mortgage life insurance so that in the event of his demise, the family can retain ownership of the house.
Who Needs Mortgage Protection?
Poor Financial Position
Mortgage protection is a must for people whose financial position is not sound. The absence of any other means of sustenance leaves the dependents in an unenviable position. In the event of the untimely death of the provider, the family may be unable to make the mortgage payments, and may end up losing the house.
Lack of Insurance
Mortgage life insurance is useful for people who may be unable to qualify for other life insurance policies. This may happen because a person does not enjoy good health or his job profile is very risky. In such cases, life insurance is generally denied, since the insurance company feels that a death benefit is imminent. In case of this kind of insurance, a person is not required to undergo any medical tests. However, he is expected to notify the insurance company about his health status. It is possible for a person to obtain mortgage protection despite being denied coverage under other life insurance policies. Even people who have been denied life insurance due to the hazardous nature of their job can qualify for this type of policy.
Premium Not Affordable
This policy is ideal for people who are unable to opt for any other life insurance policy because of their inability to pay the premium. The premium on life insurance is generally lower than the premium on other life insurance policies. The mortgage premium depends on the amount of the mortgage loan, the age of the borrower, and his physical condition. Something like tobacco use will result in a higher premium.
Types of Mortgage Life Insurance
This policy is designed to pay off the remaining mortgage assuming that the mortgage has an amortizing schedule. A mortgage is said to have an amortizing schedule if the lender expects both principal and interest payments to be made on a regular basis. For instance, in case of the fixed rate-level payment-30-year mortgage, the amount to be repaid on a monthly basis remains the same while the principal balance reduces with time. In due course of time, the interest payments exceed the principal repayments. Hence, policy that has a decreasing benefit is useful. In case a person has 20 years worth of payments left, he can opt for a decreasing term mortgage life protection. In the event of his death, within 20 years, the remaining balance is paid off to the lender. If he outlives the term of the policy, neither he nor his dependents can claim the amount.
Some lenders allow the borrower to pay only the interest payments on the mortgage. The principal is repaid in one balloon payment. Since the principal balance remains the same, a level term mortgage life insurance would suffice. Again, the policy will be operative only during the term of the mortgage.
Generally, mortgage life insurance will kick in even if a person is terminally ill. A person may pay an additional premium if he wants to ensure mortgage payments on the house even when he is critically ill. One must remember that in case of mortgage protection, the payment is made by the insurance company to the lender. The family in turn benefits by retaining ownership of the house.