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What is Mortgage Life Insurance?

If you own a house, chances are you've heard a pitch for mortgage life insurance. It often comes in an envelope from your lender and may include a letter from your lender recommending that you buy a policy. Your lender might also offer to add the premium payments to your mortgage payment. The policy itself, however, is not sold by the bank. It is always sold by an outside company.

Although called mortgage insurance, it is really decreasing term life that will pay off your house if you die.

The decreasing term policy begins with a death benefit that is equal to your current mortgage balance. The death benefit decreases each year or month in accordance with a schedule that is equal to what you have left to pay on your home.

Policies are generally available to cover a range of mortgage repayment periods: for example, 15, 20, 25 or 30 years, and the premium payment period may be shorter than the period of insurance coverage.

The premium payments for mortgage protection insurance are generally level over time. Your lender may agree to add the premium payments to your monthly mortgage payment.

Mortgage life insurance is often confused with Private Mortgage Insurance (PMI). You buy mortgage life voluntarily to protect your survivors from having to make the monthly payments. But with Private Mortgage Insurance, lenders require you to buy a policy in order to protect them (the lenders) against the possibility that you will default on the debt.

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