Mortgage protection insurance protects your loved ones by guaranteeing they’ll always have a roof over their heads. It’s somewhat like a term life insurance policy for your biggest asset (and expense), your home. The premise is simple: When you pass away, your insurance will provide your family with money to pay off the mortgage loan – and possibly more. Because the insurance is tied to your home, it typically must be purchased within two years of taking out your mortgage.
Even though it sounds similar, this is not the same as private mortgage insurance or PMI. Your mortgage lender will ask you to take out PMI if you put less than 20 percent down. That’s for their protection, not yours. PMI pays off the bank if you default on the loan.
- It may be cheaper and easier than buying life insurance for people with health risks or those who work in high-risk occupations, such as roofers.
- You most likely will not need a physical or medical exam to qualify.
- You can customize your insurance to fit your needs: a 30-year plan with full payout of the original loan or a cost-efficient 20-year plan.
- The 30-year plan pays the same benefit whether you die 5 years or 25 years into the mortgage. For example, if you took out mortgage protection insurance on a 30-year mortgage for $200,000 and you die 25 years later when the mortgage has been paid down to $40,000, your beneficiary still gets $200,000.
- Your beneficiary gets paid directly (not the bank) and can use the money for anything – to pay off the mortgage and any other bills.
- The money is tax-free.
- If you pay off the mortgage while the policy is still in effect, you can convert the mortgage insurance into a life insurance policy.
- You can also choose a return of premium option that gives you back every penny of your payments at the end of the term, tax-free, if you haven’t used the policy.