Homeowners insurance covers your house and your possessions, not your mortgage. If a burglar swipes your tablet or snow caves in your roof, homeowners insurance kicks in; if you die and your heirs need help paying the mortgage, your policy does nothing. Mortgage protection insurance is one way to help your family keep the house.
Mortgage Protection Insurance
Mortgage protection insurance is not the mortgage insurance you buy when you take out your loan. That policy reimburses the lender if you default on the mortgage. Mortgage protection insurance pays off if you die and a balance is left on your mortgage. This allows your family to inherit the house free and clear. You can also take out a policy that makes mortgage payments for a couple of years if you become disabled and can't work.
If your family would have to struggle to pay the mortgage without your income, buying mortgage protection takes care of them. It's not as tough to qualify for as health or disability insurance, which helps if, say, you have a high-risk job that discourages insurers. Some policies have a payout equal to the entire mortgage loan, even if you've paid off most of it. That gives your family extra cash they may need.
If your policy does just pay off the mortgage, your family gets a smaller payout the longer you live and keep paying down the principal. The premium, though, remains the same as long as the policy is in force. The mortgage payment goes straight to the mortgage company rather than your family. That's a drawback if your heirs can cover the mortgage and have a better use for the money -- an investment that pays at a higher interest rate, for instance.
Focusing purely on paying the mortgage can be a mistake. If you do take out mortgage insurance, it should be part of an overall financial plan for how you take care of your family after you're gone. You may be better off with alternatives, such as a large enough life insurance policy it will pay off your mortgage. Mortgage insurance is often cheaper than life insurance, but you can buy enough life insurance to pay off your mortgage with money left over.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.