Whether you’re a new or seasoned homeowner, you’re among the majority of Americans who have made this important investment. As of October 2021, U.S. Census Bureau data showed that 65.4% of Americans own their homes and the National Association of Realtors reported that the median home sales prices increased to $353,900, a 13.1% increase from October 2020.
When you consider what a home means for most families, it’s understandable that homeowners want to protect their investment and make sure mortgage payments don’t burden their families. There are plenty of insurance companies eager to help you do just that. Once you buy a home, it’s likely that insurers will reach out to offer you mortgage life insurance. If you’ve been receiving a steady stream of mailers , you might be wondering, “Is mortgage life insurance necessary?”
Mortgage life insurance is a kind of life insurance, but it has some important differences from term life insurance. While mortgage life insurance might seem like a good idea in theory, it has some serious drawbacks.
In most cases, term life insurance is a much better bet to protect your home investment, along with all the other things you’ve worked so hard to provide for your family. When comparing life insurance vs. mortgage life insurance, here’s how the two stack up.
What is mortgage life insurance?
Like all kinds of life insurance, mortgage life insurance provides a cash payout if you die while the policy is active. In this case, though, the payout is intended specifically to cover your outstanding mortgage balance.
Having some type of financial protection is important once you purchase a home to make sure your family isn’t forced to make big financial changes or move if something happens to you. Nearly half of Americans say they would feel the financial effects within six months if the primary wage earner died. If you have co-signers on your mortgage, they could also be on the hook to cover the remaining mortgage balance.
How mortgage life insurance works
With most types of mortgage life insurance, your lender receives the payout directly, and the death benefit matches what you owe. Most mortgage life insurance owners purchase a policy when they buy a home, or shortly after. As you pay off your mortgage, your coverage amount often decreases to match the current outstanding balance.
One note: mortgage life insurance is different from private mortgage insurance, which you’re often required to buy if you put down less than 20% on your home.
Why mortgage life insurance may not be worth the cost
Since mortgage life insurance is easy to get and typically doesn’t involve medical exams, it may seem like an appealing way to protect your family. Ultimately, though, it’s not the best choice for the majority of homeowners because:
- The payout goes to your lender, not your loved ones. Since the payout is intended strictly to cover your mortgage balance, your family won’t receive extra financial support to cover other needs, like day-to-day expenses, college tuition, or credit card debts.
- Your protection decreases over time. If your policy has level premiums, you might be stuck paying the same amount for less coverage as time goes on.
- Mortgage life insurance is typically more expensive than term life insurance. Mortgage life is typically considered simplified issue life coverage – which means the premiums may be more expensive than a traditional term life policy.
Alternatives to mortgage life insurance: term life insurance
When choosing a life insurance plan, the flexibility of term life insurance often makes it a far better fit for most families. A term life plan from your insurance company can help cover mortgage expenses as well as all the other financial needs of a growing family, without all the restrictions that typically come with a mortgage life insurance policy.
Many people choose term insurance over mortgage life insurance because:
- It’s affordable. Term life insurance is the most affordable type of coverage available. At Fidelity Life, a 30-year-old male can buy $250,000 in term coverage starting at less than $30 a month.
- You can choose how long you’re covered. Unlike mortgage life insurance, which only covers the period of time you’re paying your mortgage payments, term life insurance allows you to match your term length to your family’s needs. Fidelity Life offers term lengths of 10-30 years. Learn more about choosing a term length here.
- It covers more of your family’s needs. With mortgage life insurance, your payout will go directly to your lender, who will use the money to pay off your outstanding mortgage. With term life insurance, you can choose the exact beneficiaries you want to receive the payout. They can use those funds to cover anything they wish, from paying off a mortgage to student loans to other daily expenses. Not sure how much coverage you need? Our term calculator can help.
| Term life insurance | Mortgage life insurance | |
| Term length | Choose a flexible term length, typically between 10-30 years | Coverage lasts as long as your mortgage does, then stops once it’s paid off |
| Coverage amount | Coverage amounts from $50,000 to $2 million with Fidelity Life to cover any expenses you need | Coverage is only for the amount of your remaining mortgage |
| Who gets the money? | Anyone you want | Goes to your lender |
| Affordability | Most affordable type of life insurance | Often more expensive than term life |
Protecting your home and your family with life insurance
Becoming a homeowner comes with lots of new beginnings – new neighbors to meet, a new yard for the kids to play, and a new investment to protect for the future. The right life insurance plan can help make sure your family is able to spend many happy years there, no matter what the future holds.
Still have questions?
We’re here to help. Get in touch with our team or start a quote online today.
At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.
