Mortgage Protection Insurance is a type of Life Insurance policy; however, Mortgage Protection and Life Insurance are distinct from one another. Mortgage Protection Insurance is specifically designed to cover the insured’s mortgage repayments if the insured passes, while a Life Insurance policy is designed to protect the beneficiaries named in the policy.
Life Insurance Overview
Life Insurance is a type of insurance that pays out a specified sum of money to the beneficiaries of the policy when the insured passes away. The policy is a legally binding contract that is upheld in exchange for the premium(s) paid by the policy holder.
The main purpose of life insurance is to protect you and your family. The death benefit that life insurance provides functions to give some financial security to the beneficiaries of the policy.
Mortgage Protection Insurance Explained
Mortgage Protection Insurance is a type of life insurance policy that is designed to pay off the rest of your mortgage account balance if you or another policy holder passes away before the mortgage has ended. The policy is active for the same term as your mortgage loan, and it is bought when you purchase your home. The payout of this policy will go directly to your mortgage lender, and not to any beneficiaries like a Life Insurance policy.
The four main types of Mortgage Protection Insurance are Reducing Term Cover, Level Term Policy, Serious Illness, and Life Insurance Policy.
Reducing Term Cover
With this policy, the amount that the policy coverage reduces is directly in line with the current, outstanding mortgage loan balance. Therefore, the policy is set to end once the mortgage has been fully paid off. The premium will usually remain constant, but the level of coverage reduces as the mortgage loan balance decreases. This type of Mortgage Protection Insurance policy is the most common and cheapest of the four.
Level Term Policy
In this policy, the coverage level and premium you pay remain constant throughout the term length. Therefore, a premature death will prompt the insurer to pay out the original loan amount to the mortgage lender, with any additional balance contributing to the estate.
Serious illness coverage can be added to your policy. This would allow your mortgage to be paid by the insurer if you are diagnosed and recover from a serious illness that is included under the policy. This policy is more expensive than other types of coverage.
Life Insurance Policy
An existing Life Insurance policy can be used to cover your mortgage if there is enough coverage and if it is not already assigned to another loan. Any balance that is remaining once the mortgage has been covered will be paid to the beneficiaries of the Life Insurance policy.
Mortgage Protection Insurance and Life Insurance are commonly confused, but they are not the same thing. They provide coverage for different things with Mortgage Protection covering your mortgage and Life Insurance providing financial security to your family.