Is Mortgage Protection Insurance Needed? You’re Better Safe Than Sorry

Many people who have taken a mortgage to purchase a home wonder if they should also purchase mortgage protection insurance. Mortgage protection insurance is designed to pay off your mortgage if you should pass away before the mortgage is satisfied. The policy extends the length of your mortgage and the price you’ll pay for mortgage protection insurance is dependent upon how much your mortgage is for, your gender, age, and state of your health. The premium is determined at the onset of your mortgage and stays the same throughout the term of the mortgage.

Mortgage insurance requirements by lenders

If you’re under the age of 50 when you get a mortgage, your lender will require you to have life insurance or mortgage protection insurance so that in the event you pass away; your family home will not have to be sold to pay the mortgage. If you’re over the age of 50, you don’t need to have this insurance for your mortgage or if your mortgage is an investment property, you’re not required to have this insurance. However, having mortgage protection insurance can certainly be an advantage with lenders approving your mortgage. Some lenders may still require you to have mortgage protection insurance if you’re over the age of 50 or if the property is investment property. In cases where mortgage protection insurance is required, you are free to shop around for prices and get the best deal – you’re not required to purchase it from the lender who is giving you the mortgage. What happens if I pass away? If you do pass away, the insurance company will pay the benefits of your mortgage protection insurance to the lender. The lender will pay off what is left on your mortgage and will transfer the rest of the funds, if there are any, to your estate. What if the mortgage is in more than one name? If your mortgage were in two names, such as you and your spouse, then you would want to ensure that the mortgage protection insurance was in place for both people who are listed on the deed. If your mortgage is in one name only, then only that person can and will be listed on the policy. If you do have a joint mortgage, the mortgage insurance policy will be in effect if either of the people passes away.

Types of Mortgage Protection Insurance

Most mortgage protection insurance reduces each year as you pay off your mortgage – this is known as reducing term coverage. This type of mortgage insurance is the cheapest and the most common form. There is a more expensive type of mortgage protection insurance called level-term policy. This insurance gives you the same amount of coverage for the entire term of the loan. Most often, this type of mortgage insurance is used for interest only mortgages and endowment mortgages where the balance owing on the mortgage is the same until the end of the term. However, you can use level term policies for decreasing mortgages as well – what this means is that you’ll have more coverage than you need at any time, and should you perish, there will be extra money left after the insurance pays off your mortgage, which will then be transferred to your estate and/or dependants. You can also have some additions to your mortgage protection insurance, such as serious illness coverage. This includes coverage should you be diagnosed with a serious illness, and upon diagnosis would pay your mortgage. However, the premiums (payments) on this type of additional mortgage protection insurance are quite expensive and it may be wiser to seek out life insurance to cover this type of situation.

Changing your mortgage? You need to change your policy, too.

If you change your mortgage in any way, such as borrowing extra money from the principal, or extending the term of the mortgage, you will have to get new mortgage insurance. You may be able to just alter the current policy you have, however you need to be aware that your premiums on the new policy will likely be higher. If you pay off your mortgage earlier than expected you can choose to cancel your mortgage protection insurance or keep the policy and pay the premiums until the end date. If you choose the former and you perish before the term of the insurance policy is up, the insurance company would transfer the whole amount of the remaining estate to your heirs. This may not be an option, however, if you’ve taken mortgage protection insurance out through your lender. In most cases, the lender will cancel the mortgage insurance as soon as the mortgage is paid off.

Where to purchase mortgage insurance

Your mortgage lender will offer you a mortgage protection insurance policy, but you are not required to take that insurance. You can shop around for better rates. Your lender is allowed to require mortgage protection insurance; however they can not refuse you a mortgage because you choose to go with a different policy. If the lender offers their arranged mortgage protection insurance for you – essentially, they are acting as a life insurance agent and they get commission from getting you to sign up with their policy. One of the clear advantages of using the lender’s mortgage insurance is that the price of the insurance will be included in your monthly mortgage payments, which may be easier for many people. However, you may be able to find a much better insurance premium with a different company if you arrange for the insurance yourself. Many new homeowners find that their current insurance company (such as the one they use for their car insurance and for their homeowners insurance) will be able to give them a discount on their mortgage protection insurance. If you already have life insurance, you can use this as your mortgage protection insurance. However to do this, you have to assign the lender the policy you hold – they would take the funds needed to pay your mortgage off then return the rest to your estate or beneficiaries. It’s important to check with your life insurance company if this is feasible, and if the funds in your life insurance will be enough to cover your mortgage amount. If not, or if you want to ensure that there is a cash benefit to your heirs, it’s best to have both mortgage protection insurance and a life insurance policy.