Mortgage Insurance

Mortgage Insurance

Couple purchasing homeTaking out a mortgage can be a scary proposition. You owe tens or even hundreds of thousands of dollars to the mortgage holder. What happens if a family breadwinner suddenly passes away and a substantial portion of the mortgage remains unpaid?

Mortgage protection insurance covers this potential financial disaster. You can purchase a policy when you first buy your home, or later if you think your situation warrants it.

The idea behind mortgage protection insurance is straightforward: You pay a premium, which remains the same for the duration of the policy, and if you should die during that time, the insurance pays off the rest of your mortgage.

How is it priced?

Pricing mortgage protection is similar to pricing a term life insurance policy, and in fact mortgage protection is a variety of life insurance. Taken into account are age, whether the person is a smoker or a nonsmoker, and the value of the death benefits. For example, a policy covering a mortgage of $100,000 will cost about $40 to $50 a month for a 40-year old nonsmoker, depending on what state you live in.  The "death benefit" in this case is the amount you have left to pay on your mortgage. So, if you take out a large mortgage initially, your premiums will be higher. As you pay your mortgage off, the amount your policy pays off goes down, too. Meanwhile, your policy premiums remain the same because the payments have been calculated with the decreasing death benefit in mind.

Some people, of course, send in mortgage payments ahead of schedule.  The death benefit remains the amount your mortgage should have been, if you weren't paying it off early. This means that the family would receive what is left over from the death benefit after the mortgage is paid off.

While policies vary from one insurance company to another, if you should default on your mortgage, most insurers will extend your coverage for a grace period — for example, 90 days.

And what if you refinance your mortgage?

You can usually get your mortgage protection policy reissued at a more favorable premium.

Another option in shopping for mortgage protection insurance is to buy joint coverage for you and your spouse. This means that the policy pays off when either of you die.

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