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Taking out a mortgage can be a scary proposition. Now imagine if the principal breadwinner dies. How will you make the payments?
Mortgage protection insurance covers this potential financial disaster. You can purchase a policy when you first buy your home, and sometimes must buy it within a certain time period after closing escrow.
The idea behind mortgage protection insurance is straightforward: You pay a premium, which remains the same for the duration of the policy. If you die during that time, the insurance pays off the rest of your mortgage. The borrower pays for the coverage, but if you default on your loan, the lender receives the policy's death benefit.
The "death benefit" in this case is the outstanding balance on your mortgage. So, if you take out a large mortgage initially, your premiums will be higher. So, for example, if you die when you have only $2,000 left on your mortgage, that's what the death benefit will be. Even so, your policy premiums remain the same because the premiums have been calculated with the decreasing death benefit in mind.
| The "death benefit" is the amount you have left to pay on your mortgage.
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Insurers consider your age, whether you're a smoker or nonsmoker, and the principal amount of the mortgage. There is no physical exam for mortgage protection insurance.
If you made extra payments on your mortgage before your death, your family could receive some money from a mortgage protection insurance claim. The death benefit remains the amount your mortgage would be if you were making only the required minimum payments. This means after the mortgage is paid off, your family would receive the remaining death benefit.
If you refinance your mortgage, you can usually get your mortgage protection policy reissued.
One type of mortgage protection insurance provides joint coverage for you and your spouse. This means the death benefit is paid when either of you dies. The premium for such joint coverage may be lower than what you'd pay for two individual term life policies.
With a term life insurance policy your beneficiaries would have much more flexibility
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A downside to mortgage protection coverage is that the death benefit pays only your mortgage balance, and perhaps a bit more if you were ahead on your mortgage payments. With a term life insurance policy, however, your beneficiaries would have much more flexibility. The death benefit of a term life policy could be used to pay the mortgage, funeral expenses, education costs or anything else.
Finding a term life insurance policy to cover only a mortgage below $100,000 may be somewhat difficult, since term life insurance policies are generally issued for higher face amounts.
If you've purchased a home with less than 20 percent down, your lender probably required you to purchase "private mortgage insurance," or PMI.
While mortgage protection insurance will pay off your loan when you die, PMI is intended to cover a portion of your loan if you default and the benefit is paid to your lender, not your family. PMI is designed to reduce the risk faced by lenders. PMI might make it easier for you to get a mortgage, but you need another form of life insurance to guarantee your loan can be paid off should you die.
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