What type of premiums are associated with individual mortgage protection life insurance policies

Read this informative article on the differences between whole, universal and term life insurance policies and how some life insurance options can earn cash value.

Life insurance policies have two main categories: term and permanent.

Term life insurance

You can think of term life insurance as temporary life insurance. When you buy a term policy, you pay a fixed amount for coverage with a set expiration date. For example, a 20-year term policy would remain in force for 20 years from the day the coverage started as long as premiums were maintained. If you died during this period, your designated beneficiaries would receive the policy death benefit. If you live past your policy's term period and you want to remain insured, you'd need to buy another life insurance policy, or pay a new premium amount that may be significantly higher than your previous payments.

Permanent life insurance

In contrast, permanent life insurance policies don't have a set expiration date. These policies are designed to last your entire life, provided you keep making your required premium payments on time. Permanent life insurance policies offer an additional feature known as “cash value.” This is money in your policy that you can withdraw or borrow against. It is important to note that loans against an insurance policy accrue interest and decrease the death benefit and cash value by the amount of the outstanding loan and interest. There are three common types of permanent insurance policies:

Whole life insurance

Whole life insurance policies have a fixed premium, meaning you need to pay the same amount each year. Whole life insurance also provides steady, fixed growth on your cash value.

Universal life insurance

Universal life insurance policies have flexible premiums. You can change how much you pay each year; though you need to pay a minimum amount or the policy will lapse. Your earnings in a universal life policy can vary based on the specifics of your policy and the interest rates that are credited. Some years, universal policies may earn more than whole life and others they may earn less.

Variable life insurance

Variable life insurance policies allow you to invest a portion of your premium into the insurer's separate account, providing access to professionally managed investment options. You can potentially earn higher cash value with these policies. However, if your chosen investment options under-perform (or if sufficient premiums are not paid), the policy may lapse or not accumulate sufficient value to maintain the policy.

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What Is Mortgage Life Insurance?

A mortgage life insurance policy is a term life policy designed specifically to repay mortgage debts and associated costs in the event of the death of the borrower.

These policies differ from traditional life insurance policies. With a traditional policy, the death benefit is paid out when the borrower dies. However, a mortgage life insurance policy does not pay unless the borrower dies while the mortgage itself is still in existence, and where the beneficiary is the mortgage lender. The term of the life insurance policy matches that of the mortgage, and the death benefit is usually reduced each year to correspond with the new amortized mortgage balance outstanding as mortgage payments are made.

Key Takeaways

• A mortgage life insurance policy pays a death benefit to the lender if a home borrower dies during the term of a mortgage loan.
• These term policies are structured to match the number of years remaining on a mortgage, with death benefit amounts that adjust annually to reflect the reduced mortgage balance left after each year.
• Borrowers who are required by their lender to take out mortgage life insurance may also elect permanent life insurance, where they are able to name new beneficiaries after the mortgage obligation has been satisfied.

Life Insurance

Understanding Mortgage Life Insurance

There are two basic types of mortgage life insurance: decreasing term insurance, where the size of the policy decreases with the outstanding balance of the mortgage until both reach zero; and level term insurance, where the size of the policy does not decrease. Level term insurance would be appropriate for a borrower with an interest-only mortgage.

Before buying mortgage life insurance, a potential policyholder should carefully examine and analyze the terms, costs, and benefits of the policy. Remember, there are two lifespans to consider—the lifespan of the policyholder and the lifespan of the mortgage. It's also important to investigate whether one could get the same level of coverage for your family at a lower cost—and with fewer restrictions—by buying term life insurance.

Mortgage life insurance should not be confused with private mortgage insurance (PMI), a product often required by people who take out a mortgage for less than 80% of the value of their home.

Advantages of Mortgage Life Insurance

Mortgage life insurance provides near-universal coverage with minimal underwriting. There is often no medical examination or blood sample required and can be a valuable insurance policy option for any homeowner with serious preexisting medical conditions which, would prevent them from buying traditional life insurance.

Other advantages include:

• With a mortgage life insurance policy in place, heirs won’t have to worry or wonder what might happen to the family home. If a policyholder dies or becomes gravely ill and unable to work, the mortgage life insurance policy will pay off the entire mortgage loan.
• With some exceptions, most traditional life insurance policies will not pay out unless you die within your coverage period. Most mortgage life insurance policies, on the other hand, offer coverage that works if you become disabled or unable to work, which makes this type of insurance a bit more versatile than a traditional term or whole life policy.
• This coverage relieves a policyholder's worries about their family having a place to live if they die or cannot work. With the mortgage paid off, the family will always have a place to live, provided they can afford the property taxes and insurance each year.

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