Mortgage Protection Insurance
Mortgage protection is a type of life insurance policy that has been created to be used toward paying off your mortgage in the event of your death. Generally, mortgage protection insurance covers you throughout the term of your mortgage. For example, if you have a 15, 20, or 30-year mortgage, your policy should be the same amount of time or longer than your mortgage.
If you happen to pass during your insurance policy term, the death benefit will be paid directly to your beneficiary by the insurance company who can then pay the remaining balance of your mortgage. It is important that you and your beneficiary have a clear understanding of your desire to use the death benefit to pay off the mortgage, otherwise, they have the ability to use as they choose.
With mortgage protection insurance, you can also entrust your policy to your lender as their interest appears. For example, the insurance company would pay the balance of your mortgage to your lender, while your beneficiary is paid anything remaining after that. Unfortunately, this form of insurance does not cover monthly payments should you become disabled and unable to work.
Types of Mortgage Protection Insurance
In nearly every circumstance, term life insurance is recommended for mortgage protection due to its affordability, plus it can be purchased easily with larger face amounts.
Previously, insurance providers would offer a Decreasing Term Policy which allows the benefit to decrease annually as the mortgage was paid down, or reduced. This was practical due to its affordability for the policyholder.
Today, however, the cost for a Decreasing Term Policy and the cost for a level term policy is practically the same, so insurance agents typically utilize a level term insurance policy to provide coverage for your home mortgage. This strategy will allow you to leave an excess of funds for your beneficiary once paying off your mortgage should you die during the term of the policy.
Expand Your Coverage Using Riders
Most term life insurance products are designed to provide death benefit coverage only. Unfortunately, they don’t build the cash value of whole life insurance, and they don’t offer the flexibility of universal life insurance.
The good news is – times have changed. Now, most insurers offer several “riders” which allow you to broaden your coverage while creating a more extensive life insurance policy. Although not all companies offer the same riders, the following provides you an overall view of what riders are typically available. Be sure to check with your insurance agent regarding the riders that would best suit your needs.
- Accelerated Death Benefit Rider
One of the most popular options available for no additional cost, this rider allows the policyholder to be advanced a portion of their death benefit if diagnosed with a terminal illness and are expected to pass within the year. Once the insured dies, the advanced amount will be deducted from the policy’s death benefit and distributed to the beneficiary.
- Critical Illness Rider
Similar to the previously mentioned accelerated death benefit rider, except that the advance on the death benefit is available in times of certain illnesses rather than unexpected death. This option would need to be discussed with the individual insurance company because the illnesses covered varies among providers.
- Disability Income Rider
Another popular option due to its living benefit nature, this rider provides the policyholder a monthly benefit so as to cover lost income due to a disability. Benefit and maximum benefit varies among companies, so be sure to speak with your agent regarding your eligibility.
- Return of Premium Rider
This rider converts the cost of insurance from an expense into an investment and returns all premiums paid in on the policy should you live past the policy term. The refund is then paid to the policyholder in a tax-free lump sum. This attractive investment can be used for any reason you choose, including supplementing your retirement income.
- Term Conversion Rider
Primarily included into newer policies, the term conversion rider allows the insured to convert all or part of their term insurance into a permanent form of life insurance, such as universal or whole life, without the need to prove insurability. This is particularly useful after developing medical problems while insured.
What if I sell my Home and then by another with a Larger Mortgage?
Since your mortgage protection insurance covers you and not your home, it is transferable to another home with a larger mortgage. If your current policy is insufficient to pay off your newer larger mortgage, just buy additional coverage for the difference. Once your new mortgage is reduced to the amount of your original policy, simply cancel the added coverage or keep it active.
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