Mortgage life insurance pays off the mortgage on your home in the event that you die or become disabled.
There are two options for mortgage life insurance:
- The first option is traditional term mortgage life insurance. This insurance has a set premium for the life of the mortgage. The upside to choosing this option is that if you live until the mortgage is paid off, then you are paid back all of the premiums that you paid to the insurance company. The reason that they can offer this and still make money is because your premiums are put into interest yielding investments until they are returned; you don’t get the interest, the insurance company does. If you purchase a house young and plan on living in the house for the length of your mortgage, then this type of policy can be used as a nest egg, of sorts, for retirement.
- The other type of mortgage life insurance is decreasing term insurance. What happens is that after the first five years of paying the top premiums, your premiums decrease every couple of years to reflect the reduction in your mortgage and the benefit payout. This continues until your mortgage is paid off. You do not, in most cases, see a return of premiums when you choose this option. Instead – the benefit is greatly reduced premiums over the years.
Some insurance companies offer a disability benefit that pays your mortgage payment if you are temporarily disabled and cannot pay your mortgage.
