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Mortgage Protection with Life Insurance 

Housing and household expenses, including mortgage payments, make up the largest portion of living costs in the U.S.1 If the homeowner passes away, surviving loved ones left with the mortgage may have a significant financial burden. Mortgage protection life insurance can help alleviate these concerns by paying off the mortgage if the policyholder passes away while the policy is active. This article will explain how mortgage life insurance works and examine its pros and cons to see if it’s right for you.

What is mortgage life insurance? 

Mortgage life insurance, or mortgage protection insurance, is a unique form of life insurance designed to pay off the policyholder’s mortgage if they pass away during the policy term.2 This helps beneficiaries eliminate significant debt, which can save them a lot of money each month. Plus, it gives them access to more equity in the home to borrow against or gain more proceeds if they sell it.

Although Aflac doesn’t offer mortgage life insurance, our term and whole life insurance policies offer payouts beneficiaries can use to help cover mortgage payments or even pay off the mortgage, alongside other expenses.

Pros and cons of mortgage life insurance 

Here are a few benefits and drawbacks of mortgage life insurance:3

Pro: No medical exam 

Mortgage life insurance policies generally don’t require a medical exam and, in some cases, may not even ask health questions. This can make this policy more accessible to homeowners who don’t like to take medical exams for life insurance or want to get coverage more quickly.

Pro: Level premiums 

Mortgage life insurance premiums are level, meaning they don’t change throughout the policy term once you get the policy. The predictability of level premiums can allow you to easily budget for your coverage.

Pro: You can add riders

Riders are add-on coverages with which you can customize your mortgage life insurance policy. For example, a waiver of premium rider can help cover your premiums if you become disabled and unable to work during the policy term.

Pro: Easy to manage

Mortgage life insurance is designed to be easy to manage, and the death benefit goes straight to the lender. Your beneficiaries must file a claim but don’t have to manage the funds once paid out.

Con: Beneficiaries can’t use the death benefit for any other expenses

As mentioned, the insurer pays the life insurance death benefit directly to the mortgage lender. Since beneficiaries don’t receive the proceeds, they can’t use it to help pay other debts or expenses. Therefore, this policy may not work if your beneficiaries need to help cover other costs.

Con: Decreasing payout 

Since these policies are designed only to pay off a mortgage, your death benefit decreases as you pay down your mortgage. Plus, you must continue paying the same premiums for this decrease in coverage. Eventually, your policy ends if you pay off the mortgage before passing away. You won't receive a death benefit for the premiums paid.

Con: Can be expensive

Mortgage life insurance can be expensive for the level of coverage you can receive since there’s no medical exam. Additionally, your cost per dollar of coverage increases with time since premiums are level while the death benefit decreases.

Con: No cash value

Mortgage life insurance lacks the cash value growth component of permanent life insurance. Therefore, you can’t use it as an additional wealth-building vehicle while the policy is active.

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How mortgage protection life insurance compares to other policies

Here’s how mortgage life insurance compares to traditional life insurance policies:

Term life insurance

Like mortgage life insurance, term life insurance doesn’t last forever. Many types also have level premiums. However, premiums tend to be lower per dollar of coverage, and term lengths work differently. You can choose a fixed period of 10 to 30 years, depending on your needs.

The death benefit doesn’t decrease with time, so your beneficiaries receive the full value regardless of when you pass away during the policy term. Furthermore, beneficiaries receive the payout rather than a lender. They can use it for anything, whether that’s helping to pay your mortgage, replace your income, or save for the future. Overall, term life insurance may be a better option for homeowners seeking a cost-effective, flexible option to cover their beneficiaries.

Whole life insurance 

Whole life insurance lasts for life, unlike mortgage life insurance. Premiums are higher than term life insurance, but also level. The death benefit doesn’t change, either. Furthermore, whole life insurance builds wealth in a cash value growth component. Each premium adds to the cash value, which grows tax-deferred at fixed interest.

Eventually, you can borrow against or withdraw from the cash value. This cash value could help you with your mortgage while still alive. For example, cash value loans offer low rates and no repayment date. This could help you pay down your mortgage faster, essentially refinancing with a better loan. Whole life insurance could work well for homeowners with a bigger budget and more complex financial needs.

Is mortgage life insurance right for me?

Consider the following to determine if mortgage life insurance is right for you:

  • Your loved ones’ financial needs: If your loved ones rely solely or heavily on your income, a mortgage life insurance policy can be helpful. It helps you avoid burdening them with a large, long-term debt while allowing them to gain full ownership of a valuable asset if you pass away.

  • Your mortgage balance and term: If you’re close to paying off your mortgage, you may not need a mortgage life insurance policy. On the other hand, a large balance or long remaining term may necessitate getting a policy.

  • Your budget: Mortgage life insurance has a high cost per dollar of coverage. Weigh your budget against your life expectancy and loved one's ability to pay off the mortgage.

  • Interest rates: If your mortgage has a low interest rate and your loved ones can afford to live without your income, you may consider a traditional life insurance policy.

  • Tax benefits: If you don't get a mortgage protection policy, loved ones may be able to take advantage of mortgage-related tax advantages, such as the mortgage interest deduction. If they can afford the mortgage comfortably, they may prefer this option to reduce their tax burden. A more flexible policy may allow them to keep more of the proceeds for other uses while the tax deduction mitigates some of the cost of interest.

Learn more about Aflac’s life insurance policies

Mortgage life insurance can be a helpful option for homeowners whose beneficiaries would need help covering the mortgage if they pass away, such as in dual-income households where the homeowner earns substantially more. The death benefit payout can help provide financial security through less debt and full home equity. However, the cost per dollar of coverage starts high and increases as the death benefit drops. Plus, beneficiaries can’t use the payout for anything else.

Aflac offers term and whole life insurance policies with reasonable premiums and extensive coverage customized for your needs. Your loved ones can use the death benefit for almost anything, including paying off a mortgage. Speak with an agent today to find out which is best for you and get a quote.

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