Mortgage life insurance provides relief in the event of your death by covering your outstanding balance, thus protecting your family from falling behind on payments, foreclosure, or selling of the house.
However, mortgage protection policies differ from traditional life insurance in that beneficiaries cannot use any funds from such policies for other purposes than mortgage payments.
Term Life Insurance
A term life insurance policy is an agreement between you (the policyholder) and an insurer. In exchange for paying a set premium, they promise to pay out an agreed-upon death benefit upon your death, typically tax free. This amount depends on you and your family’s individual financial needs – such as covering funeral costs or mortgage payments after death.
A term life policy pays out a set amount if you die during its term (typically 10-30 years), typically being distributed as death benefit to beneficiaries. Should you outlive this coverage period then coverage ends without further payout.
At the end of your policy term, if you wish to continue life insurance coverage, renew or convert it and pay an additional premium. Term life is typically cheaper than whole life and makes for an excellent solution if you only require coverage temporarily or are supplementing existing life policies with it.
There are various kinds of term policies available, including annual renewable policies, guaranteed universal policies and decreasing term life insurance policies. A declining term policy works similarly to standard level term policies except its death benefit decreases each year while your premium remains the same; these can often be used with mortgages or large loans where its decline directly corresponds with decline of loan principal and payment to lender upon your death.
Some term policies also offer an “accelerated death benefit rider”, enabling access to part of your death benefits while you’re still alive. This feature is typically included with all term policies, providing access to cover medical expenses or fulfill a final wish or bucket list activity while you still can. It can be an invaluable addition to any life insurance policy and should be discussed further with your agent if interested.
Whole Life Insurance
Whole life insurance provides lifetime death benefit protection in exchange for regular, level premium payments and also has a savings portion called cash value, which accumulates interest tax-deferred. The growing cash value is an integral component of whole life, as its money can be used to pay off mortgages, provide cash benefits for family upon your death and/or help cover long-term care expenses – but any outstanding loan principal and unpaid interest could reduce its death benefit when claimed or surrendered from.
Your death benefit, which will be paid tax-free to the beneficiary or beneficiaries you select, may also be used to cover final expenses such as funeral costs and medical bills as well as debt. Some whole life policies offer additional services for an extra fee such as waiver of premium riders or accelerated death benefits that allow access to part of your death benefit while still living; these could come in handy during times of terminal illness.
Many whole life policies offer policyholders the chance to earn dividends, which can be applied toward future premium payments as credits against your costs. This may reduce annual out-of-pocket expenses; however, no guarantees exist that whole life policies will yield returns, and cash values may fluctuate over time.
Whole life insurance offers permanent death benefits. Furthermore, surrendering your policy any time allows for cancellation and payout of any accumulated cash value; however if this occurs before outliving its terms this amount will be deducted.
Mortgage Protection Insurance (MPI)
Home mortgages can be one of the biggest financial commitments a family makes, and in the event of something tragic happening to loved ones they could find it difficult to meet payments on time. Mortgage protection insurance provides funds to ensure surviving loved ones will keep their home even in such circumstances.
However, it is wise to shop around and carefully evaluate all available mortgage protection policies before making your selection. Some may be more expensive than others and could come with hidden fees not clearly outlined on the contract agreement.
Mortgage protection insurance policies are typically created for one specific purpose – repaying home loans upon your death. They should not be seen as an alternative to life insurance; often times term life policies with additional living benefits (such as disability income protection or critical illness coverage) can be more cost effective.
Mortgage protection policies differ significantly from life insurance in that they usually do not allow beneficiaries to be named, meaning the death benefit will go directly to your lender instead of being distributed among family members as desired. This can be problematic for families that would prefer using their death benefit to cover other debts or expenses.
As your loan balance decreases, its death benefit decreases over time as well. This may leave your family paying for less coverage in subsequent years.
Mortgage Protection Insurance may seem an appealing solution because of its hassle-free coverage without medical exams or extensive health records, making it accessible even if a person does not qualify for traditional life insurance due to health conditions or risky jobs. So if you want an economical way of guaranteeing that your mortgage payments will continue posthumously then this type of policy might be worthwhile considering. It is wise however, to review all available plans first before selecting an individual plan.
Final Expense Insurance
Final expense insurance (sometimes called burial or funeral insurance) is a type of whole life policy designed to cover funeral costs as well as end-of-life expenses such as unpaid medical bills, legal fees and housing costs. It can often be more affordable than traditional life policies because it does not require a health exam (or only requires a simple one) for purchase and it can often be purchased directly from insurers or funeral homes directly – although be mindful that it may not cover everything; for this reason use additional forms of life coverage together for best results.
Dependent upon your circumstances and age, final expense policies might not be necessary for everyone. If you possess substantial assets or enough savings, term or whole life insurance might better meet your needs; but for those struggling financially due to debt or having dependent family members that might benefit from having assistance after death; final expense policies provide vital assistance by covering bills due and providing stability after your passing.
When purchasing a final expense policy, you must name a beneficiary. Usually this means your spouse, child or other relative but you can choose any person as long as they have an insurable stake in your continued existence. Once deceased, this beneficiary will receive their death benefit while being able to use its tax-free savings component for ongoing expenses.
Final expense policies can be an ideal solution for individuals who do not qualify for more comprehensive life insurance due to health conditions or preexisting medical issues, which typically do not require a medical exam and typically cater to people over the age of 50.
Though final expense insurance policies provide benefits immediately upon death, it may be more prudent to wait until your assets can cover funeral and other expenses. Furthermore, this waiting period gives you time to accumulate enough savings to cover ongoing costs.
