Life insurance is designed to protect your family from financial catastrophe in the event of your untimely death. Utilizing term life insurance as a means to protect your family from the burden of not being able to make a mortgage payment is common. Because the benefits of the life policy could (or would) go toward paying off a mortgage, financial planners and banker like to call this life insurance "mortgage protection insurance".
The difference between this term life insurance and a policy that your bank might try to sell you with your mortgage, is that this life insurance stays with you no matter where you live, no matter how much you still owe on your mortgage, as long as you stay current with the premiums. Even if you apply for a life insurance policy that requires your mortgage documents as part of the financial underwriting process, once you accept the life policy, it’s yours.
Bankers, on the other hand, will most likely sell you a "mortgage protection policy" that decreases in benefit with the loan, and also disappears when you no longer have a loan with them. This policy also makes the bank the benefactor of the policy.
This is different than PMI - Private Mortgage Life Insurance. PMI is what is required by your bank or lender if you aren’t able to make a down payment (typically 20%) when purchasing or building new home. PMI is handled by the bank or lending institution.
In summary, a term life insurance policy, taken with the purpose of paying off the mortgage should an untimely death of a significant wage earner, can be considered mortgage protection.
For more information on mortgage protection, contact knowledgebroker Tom Driscoll.
