Mortgage life insurance pays off the remainder of your mortgage if you die. Your premiums remain the same during the policy, but the payout if you die decreases over time, in line with the decreasing mortgage balance.

If you’ve ever bought a home, you likely started receiving mail about mortgage life insurance.

How does mortgage life insurance work?

Mortgage life insurance is typically purchased soon after you buy a home and the policy lasts the same number of years as the mortgage. It’s often marketed by insurance agencies affiliated with mortgage lenders, or insurance agents and companies that find your mortgage information from public records.

Any mortgage life insurance payout is made to the mortgage lender. If you don’t die while the policy is in force, there’s no payout and no refund.

What is the difference between life insurance and mortgage life insurance?

One of the big differences between life insurance and mortgage life insurance is how the death benefit is paid. With most types of life insurance, the life insurance money goes to the beneficiary you choose. That person can use the payout however they like, including paying off a mortgage, paying college tuition, or using it for daily expenses.

With mortgage life insurance, also called “mortgage protection life insurance,” the death benefit is paid directly to the mortgage lender and is used only to pay off a mortgage.

Other types of life insurance provide more flexibility to your family. Paying off the mortgage might not be a top financial priority if you die.

Is mortgage life insurance a good idea?

Mortgage life insurance is very limited in what it covers, so it may not be a good idea if you have financial obligations in addition to a mortgage. Here’s a look at common pros and cons for mortgage life insurance.

Pros and cons of mortgage life insurance

Pros:

  • Guarantees your home loan will be paid off. The policy ensures the balance of your loan is paid off, so your family doesn’t have to worry about losing their house.
  • You generally don’t have to get a medical exam. Mortgage life insurance policies generally don’t require a life insurance medical exam. The application may have health questions, however, such questions about tobacco/nicotine products, AIDS, alcohol and drug abuse, stroke, cancer, Alzherimer’s and more. Keep in mind, there are other options for life insurance with no medical exam.

Cons:

  • You don’t have flexibility with the payout. Because the death benefit goes directly to the lender, your beneficiaries won’t receive any of the money. Other bills, such as credit card debt, might be more troublesome for your family.
  • The payout of the policy decreases. As you make mortgage payments, the principal balance of your loan goes down, as does the payout the mortgage life insurance would make. Your mortgage life insurance premiums will stay the same, but you’ll be paying for less coverage.

If you have specific financial obligations (such as a mortgage or other debts), term life insurance can be a better choice than mortgage life insurance. Here’s why:

  • A term life policy may be cheaper. It’s a good idea to compare costs between the two.
  • Your life insurance beneficiary can use a term life insurance payout however they like.
  • You can match the length of a term life policy to your mortgage -- or other obligations. For example, if you have a 30-year mortgage, you could consider a 30-year term life policy.
  • Term life generally has a fixed payout, meaning it will not go down over time.
  • With a term life policy, if you pay off your mortgage early, your beneficiaries will still have a death benefit for other bills.
  • Convertible term life insurance can be turned into whole life insurance if you decide you want to switch policy types later.

What’s the difference between mortgage life insurance and private mortgage insurance (PMI)?

Mortgage life insurance is a policy that pays off a mortgage if you die. Private mortgage insurance (PMI) protects a mortgage lender in case you stop making payments on the loan. PMI is typically required if you put down less than 20% of the purchase price of a home.

Having PMI provides no funds to your family if you die.