Mortgage Protection Insurance: Benefits, Drawbacks, Alternatives & Costs

If you are a homeowner, you may have been asking yourself if it is worth the money to get mortgage protection insurance. Mortgage protection insurance can be a beneficial investment for your family and your home in some cases. However, it might not be the right choice for everyone. In this article, we will go over some of the benefits of mortgage protection insurance, as well as some of its drawbacks and alternatives that homeowners should consider before making a decision.

What is mortgage protection insurance? 

Mortgage protection insurance is a type of life insurance policy you can purchase to cover mortgage costs in the event of your death. Your monthly mortgage payment includes the cost of the policy, which you pay each month until you have paid off your home, usually after 15 or 30 years.

What are the benefits of having mortgage protection insurance

Because mortgage protection insurance is specifically tied to your mortgage balance, and the funds are exclusively earmarked to be used to cover your mortgage debt, you won’t have to worry about your family losing their home in the event of your passing. 

Another advantage is that mortgage protection insurance does not necessitate a physical examination, making it more accessible for individuals with higher risk factors such as age or health conditions.

What are the disadvantages of mortgage protection insurance?

The main drawback to mortgage protection insurance is that it only provides coverage on your home’s balance. This means that if you have a lot of money saved up, life insurance policies or other assets, they will not be covered by this policy and could possibly go to someone else after your death.

Another drawback is that the policy only covers your mortgage balance, not any other outstanding balances.

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

While mortgage protection insurance is very similar to term life insurance, there are three key differences:

1. The payout for mortgage protection insurance will go directly to paying off your mortgage, and the funds cannot be used for any other purpose. While a term-life insurance policy offers financial protection for everyday expenses, retirement costs, education, and more. 
2. The length of the term for mortgage protection insurance has very little flexibility, locking you into the same amount of time as your mortgage loan term, 15 or 30 years. Where the length of the term for term life insurance policies are flexible and some insurance companies even allow you to customize the length of the term specifically for your needs.
3. Lastly, the cost of mortgage protection insurance is usually significantly higher than term life insurance. 

What are mortgage protection insurance policy alternatives?

Aside from mortgage protection insurance, there are several other options that provide similar or even better protection. Term life insurance policies can protect your home’s balance in the event of your passing. Another alternative is purchasing a whole life plan that will cover not only you, but also provide some coverage for surviving family members after your death.

Whole life insurance policies are more expensive than policies offered by most mortgage protection insurance companies and much more expensive than a term life insurance policy.

Term life insurance offers many of the same benefits as mortgage protection insurance, but with a greater degree of flexibility than mortgage protection life insurance.

One particularly effective plan is to buy a customized policy that has a combination of a whole life and a short-term life insurance policy. The short-term policy will protect you for the first 10-15 years, when your mortgage debt is at its highest and the additional whole life policy offers long-term protection to cover the entire duration of the mortgage. Even after your mortgage is paid off, you are able to use your remaining coverage to protect your family’s lifestyle, or to create a tax-free inheritance for your loved ones or possibly even to generate income for retirement.

Is buying mortgage protection insurance a worthwhile investment? 

If you cannot qualify for an affordable life insurance rate due to your age or a health condition, mortgage protection insurance may be the appropriate solution for you. However, the majority of people will benefit more from alternative policies that provide more protection, are more flexible, and more affordable. 

Many people choose not to buy mortgage protection insurance policy or an alternative insurance policy because they feel like it’s an unnecessary expense, but if the unthinkable should happen, your loved ones are at risk of being left with an unmanageable financial burden. So find out more about these different policy options and decide for yourself whether this investment makes sense for you and your loved ones. I'm available to answer any questions on what policy is best suited for you. Book a call with me today.

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