Mortgage Life Insurance Options
Mortgage life insurance keeps your family in its home even if the wage-earner dies.
There is a particular product sold as "mortgage life insurance," but really you have the option to use any type of life insurance you please to cover your mortgage. Here are a few ways to protect your home with life insurance:
Default: mortgage life insurance
Mortgage life insurance, also called mortgage protection life insurance, is bound to your debt so that its death benefit decreases as your mortgage decreases. If it ever pays out, its death benefit will be exactly large enough to pay off the mortgage.
Decreasing the death benefit over time reduces the financial risk for the insurance company, so it can afford to offer lower premiums. However, the administration cost of repeatedly adjusting the death benefit can raise the cost of the policy, offsetting the savings.
Term life insurance
Term life insurance is simple and cheap. It may be cheaper than using mortgage protection life insurance for some debts. There's nothing wrong with buying a term life insurance policy (or any other type of policy) to cover your mortgage.
Decreasing term life insurance
If buying a term life insurance policy is appealing to you, buying one with a decreasing death benefit will probably be better.
It is more affordable than a comparable amount of ordinary term life insurance because the death benefit decreases over time. The benefit does not decrease to match your mortgage, however. Rather, it decreases according to a fixed schedule. (That may be of no consequence to you, since you may choose to pay off your mortgage according to a schedule.)
Pay the interest only
You may choose not to pay off your mortgage in life, letting life insurance proceeds take care of it upon your death. If that's the case, the best policy will be a permanent one — probably a whole life insurance policy because it guarantees a death benefit of a fixed amount. With whole life insurance, all you need to do is pay the fixed premiums on the insurance policy and pay off the interest on the mortgage so that it doesn't grow any larger.
Integrate it
You don't need to buy a life insurance policy dedicated to your mortgage. You can buy a life insurance policy devoted to covering multiple expenses, your mortgage among them. The benefit of this option is that you can often obtain a large policy more cheaply than you would several smaller policies.
