How Life Insurance Protects Your Mortgage and Home
For most families, the house is the biggest bill and the biggest asset. If the person whose income pays the mortgage dies, the lender still expects a payment next month. Life insurance can make sure your family keeps the home, but there's more than one way to set it up, and some cost a lot more than others.
Two ways to protect a mortgage
| Mortgage protection insurance (MPI) | Regular term life insurance | |
|---|---|---|
| Who gets paid | Often the lender, directly | Your beneficiary, who decides how to use it |
| Death benefit over time | Often decreases as the loan is paid down | Stays level for the whole term |
| Premium | Usually level, even as the benefit shrinks | Level |
| Underwriting | Often simplified; few health questions | Full or simplified, depending on the policy |
| Price for a healthy person | Often higher per dollar of coverage | Usually lower |
| Flexibility | Tied to the mortgage | Pay the mortgage, or keep it and use the money elsewhere |
| If you refinance or sell | May end or need to be replaced | Coverage continues |
For people in good health, a level term policy usually gives more protection and more choice for the same money. Mortgage protection plans can make sense for people whose health would make regular term expensive or unavailable, because they often ask fewer questions.
Don't confuse it with PMI
Private mortgage insurance (PMI) is required by many lenders when you put down less than 20 percent. It protects the lender if you stop paying. It pays nothing to your family if you die.
How to match coverage to your home loan
- Find your balance and years remaining. Your latest mortgage statement has both.
- Choose a term at least as long as the loan. A 30-year mortgage taken out 3 years ago needs about 27 more years; a 30-year term covers it.
- Choose an amount at least equal to the balance. Add property taxes and insurance if those would be hard for your family to keep up.
- Add it to your other needs. The mortgage is usually one piece of a bigger coverage number. See the needs worksheet.
Pay it off, or keep paying?
With a level term policy, your family can choose:
Pay off the house
No more payment, lower monthly expenses and a sense of security. Many families find this lifts a huge weight.
Keep the mortgage
If the interest rate is low, the family might keep making payments and use the rest for income, savings or college.
Texas homeowners: a few things to know
- Texas has strong homestead protections that shield a primary home from most creditors, but they don't stop the mortgage lender from foreclosing if payments stop.
- A surviving spouse can often stay in the homestead, but someone still has to make the payments.
- Life insurance proceeds paid to a named beneficiary are generally protected from the deceased's creditors under Texas law.
Example
A couple owes $210,000 on a home with 26 years left. They each buy $300,000 of 30-year term. If either one dies, the other can pay off the house and still have $90,000 left for bills and the kids, or keep the low-rate mortgage and invest the full amount.
Keep the house in the family
We'll compare mortgage protection plans and level term side by side, so you can see which gives your family more for the money.
This guide is general education, not tax, legal or financial advice. Product features, issue ages and prices vary by carrier and state and change over time.