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What is Mortgage Life Insurance?
Mortgage life insurance is any life insurance policy which covers the life of the borrower in a mortgage loan and assigns the mortgage lender as a creditor-beneficiary entitled to recoup their losses from the life insurance policy. The bank or lender will be designated as the assignee for the collateral of the life policy.
Historically speaking, mortgage life insurance was a term policy with a decreasing death benefit, also called a face amount, that equaled the remaining amount due on the mortgage loan. As the home was paid off, the amount of life insurance required would decrease, and, in most cases, the premium with it.
Today, term life policies have become so competitively priced that it no longer makes sense to take a decreasing face amount policy when a level face amount policy costs only a small amount more, generally speaking. This allows the policy holder to assign the bank as the beneficiary for any amount left on the loan and then the policyholder’s heirs would receive the remaining balance.
Term policies have a specific length that they will be in force, or will have a guaranteed level premium. In the case of a mortgage this should be matched to the term length of the mortgage.
In some cases, cash-value life insurance policies will be used as collateral for a loan, and the bank would be entitled to the cash value if the borrower defaulted, but was still alive. Cash value policies include whole life, some universal life policies, variable universal life, and so on.
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