Even if your home isn't your family's largest asset, it's likely to be your largest single lifetime purchase.1 As of June 2020, the median home value in the U.S. was around $278,000—more than a quarter of a million dollars.2
As a result, it is important for homeowners to protect themselves (and their loved ones) financially by doing what they can to help ensure that their mortgage will still be paid—no matter what might happen in the future. A mortgage protection insurance policy and term life insurance can be two important components of a homeowner's financial plan. Learn more about these products and the benefits they can provide to homeowners.
Mortgage Protection Insurance
This insurance is a type of life insurance that directly benefits your mortgage lender and, in so doing, indirectly benefits your surviving family members. If the borrower passes away before the mortgage is paid off, the mortgage protection insurance goes directly to the lender to pay off any remaining mortgage balance. The mortgage lender will then release the lien, vesting free and clear title in the borrower's surviving family members.[1]
Unlike other types of life insurance, the face value of mortgage protection insurance will go down as time passes and your mortgage balance decreases. This insurance isn't intended to provide a windfall for surviving family members, but just to protect against needing to move or worry about foreclosure while they are still grieving.[2]
Term Life Insurance
One way to purchase your own mortgage protection insurance is to take out a term life policy in the amount of your mortgage. Ensure that the term is at least as long as the number of years remaining on your mortgage. As many term life insurance policies have 15-, 20-, or 30-year terms, many people find it fairly easy to find a policy that matches up with their current mortgage.[3], [4]
Unlike mortgage protection insurance, the value of term life insurance will not decrease as your mortgage balance goes down; if you take out the policy years before you pass away, your family won't need to put all these funds toward the mortgage. Instead, they can use these extra funds to defray funeral expenses, pay bills, or fund home maintenance or improvement projects. Most life insurance proceeds are tax-free, which can help these funds go even further.[5]
If you're wondering whether mortgage protection insurance or term life insurance is the best way to protect your family in the event of your untimely death, it's a good idea to talk to a financial professional. Few people ever regret being "over-insured," but the right type of life insurance for you will depend on a variety of factors like family size, income, age, and even the cost of living or tax rates in your area. A financial professional can work with you to determine the best option for your unique situation.
Important Disclosures:
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
1 https://www.kiplinger.com/article/real-estate/t010-c015-s002-home-sweet-asset.html
2 https://dqydj.com/historical-home-prices/
https://www.nationwide.com/lc/resources/investing-and-retirement/articles/mortgage-protection
[1] Do You Need Mortgage Protection Insurance? | Policygenius
[2] Decreasing Term Insurance Definition (investopedia.com)
[3] Mortgage Protection Insurance: When You Might Need It | Bankrate
[4] What's the Right Life Insurance Policy Term Length? | Haven Life
[5] Best Life Insurance for Seniors (Term vs Whole, Affordable, No Exam) (lhlic.com)
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