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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance.

What You Should Know about the Two Types of Mortgage Insurance

What You Should Know about the Two Types of Mortgage Insurance

By Britt Erica Tunick

If you are a homeowner, you know that banks require proof of home insurance before they will give you a mortgage. But did you know that you can also take out mortgage insurance?

There are two types of mortgage insurance, one that benefits your lender and a second type that benefits you. The first, known as private mortgage insurance, is something that is often required by banks if a borrower has limited assets and is unable to pay 20% or more of the purchase price of their home in cash. Though it is the borrower who pays the premiums for such insurance, the beneficiary is the lender. In the event that you default and are unable to pay off your loan, private mortgage insurance will pay your lender what you ultimately owe. In most cases, such insurance policies are even purchased through your lender.

Mortgage life insurance is the second form of mortgage insurance and is essentially a variation on life insurance. This type of insurance policy is a guarantee that your family will not lose your home in the event of your death, or if something happens that leaves you physically unable to work. Just as with private life insurance, while the homeowner pays the premiums for mortgage life insurance, the lender is the beneficiary, and will receive whatever unpaid portion of your mortgage remains if a payout is triggered on the policy. At that point, your home will be completely paid off and owned by your family, though they will still need to continue paying property taxes.

While insurance that leaves your family with a fully paid home may sound attractive, it may not necessarily be the best investment. As with typical life insurance policies, most mortgage life insurance policies have fixed premiums, but the ultimate payout of the policy declines over time. That’s because the further you get into paying off your mortgage, the less the policy needs to pay if anything happens to you and a claim is ultimately made. Unlike typical life insurance, where any payout goes to your family who can then determine where to use that money, the payout from a mortgage life insurance policy goes directly to your mortgage lender. That means your family could still be left without the money necessary to pay off other debts or expenses.

Depending on your individual goals and situation, traditional life insurance policies, such as term life insurance that extends beyond the length of your mortgage, may be a more appealing option because of the flexibility it provides the beneficiary. If, however, such flexibility is something you do not want to provide to family members, for whatever reason, mortgage life insurance could be your best bet.

Before purchasing insurance, make sure to speak with a financial advisor or a trusted insurance broker about the benefits and drawbacks of all options to determine what is best for your individual situation.