But with mortgage life insurance, your mortgage lender is the beneficiary of the policy rather than beneficiaries you designate. If you pass away, your lender is paid the balance of your mortgage. Your mortgage will go away, but your survivors or loved ones won't see any of the proceeds.
While it isn't mandatory, mortgage life insurance offers enough coverage to pay off your mortgage so your family will not have to move if you pass away.
As the name implies, mortgage protection insurance (also called mortgage life insurance and mortgage protection life insurance) is a policy that pays off the balance of your mortgage should you die. It often is sold through banks and mortgage lenders.
Generally, when term life insurance expires, the policy simply expires, and no action needs to be taken by the policyholder. A notice is sent by the insurance carrier that the policy is no longer in effect, the policyholder stops paying the premiums, and there is no longer any potential death benefit.
With your mortgage paid off, you do not have to send the mortgage company any more money. Send discharge of mortgage letter to your county: Your mortgage company should send all of the required documents to your county clerk's office notifying them that your home is no longer bound by a mortgage.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
End of the mortgage term
Once a mortgage term has ended, any outstanding balance is due immediately. This can leave the homeowner with limited options: sell, remortgage, or face possession action in the courts.
By law, if you cancel a term life insurance policy within 30 days of purchasing it, the company must refund any money you paid. In addition, if you pay some of your premiums ahead of schedule and then cancel your policy, the company should return those early pre-payments.
Can You Cash Out A Life Insurance Policy? You can cash out a life insurance policy while you're still alive as long as you have a permanent policy that accumulates cash value, or a convertible term policy that can be turned into a policy that accumulates cash value.
Term life is designed to cover you for a specified period (say 10, 15 or 20 years) and then end. Because the number of years it covers are limited, it generally costs less than whole life policies. But term life policies typically don't build cash value. So, you can't cash out term life insurance.
A mortgage life insurance policy is a term life policy designed specifically to repay mortgage debts and associated costs in the event of the death of the borrower. These policies differ from traditional life insurance policies. With a traditional policy, the death benefit is paid out when the borrower dies.
Life insurance allows you, the policy owner, to build cash value through your life insurance policy that accumulates over your lifetime. This is considered a living benefit of life insurance because, in contrast to a death benefit that pays out when you pass away, you can use the money while you're still alive.
Mortgage underwriters count life insurance as an asset for your mortgage application if the policy has a cash value that exceeds the surrender cost. Generally, permanent life insurance products -- including whole, variable and universal life insurance -- contain a cash value.
If you want your life insurance to cover your mortgage, consider how many years you have left until you pay off your house. You don't want your policy to expire after 20 years if your mortgage payments will last another decade after that.
If you're single and have no dependents with enough money to cover your debts as well as the expenses related to death—your funeral, estate, attorney fees, and other expenses—then you may not need life insurance.
Once you pass 50, your life insurance needs may change. Perhaps the kids are grown and financially secure, or your mortgage is finally paid off. If so, you may be able to reduce or eliminate coverage. On the other hand, a disabled dependent or meager savings might require you to hold on to life insurance indefinitely.
The cash value is built up through the amount paid, in which if you pay $5, then you also accrue $5 in cash value. Paid-up additions also offer a death benefit and earn dividends/interest from the insurance company, which are then put into your cash value.
Unlike permanent forms of life insurance, term policies don't have cash value. So when coverage expires, your life insurance protection is gone -- and even though you've been paying premiums for 20 years, there's no residual value. If you want to continue to have coverage, you'll have to apply for new life insurance.
Paying off your mortgage does not dramatically affect your credit score.
At the end of the term, you can renew or renegotiate your contract, including the interest rate and payment schedule. You also have the choice of staying with your current lender or shopping around to find a better deal. This ensures you aren't locked in to the same agreements over the entire length of your mortgage.
Using one of these options to pay off your mortgage can give you a false sense of financial security. Unexpected expenses—such as medical costs, needed home repairs, or emergency travel—can destroy your financial standing if you don't have a cash reserve at the ready.
Many Retired People Don't Expect to Pay Off Mortgages
The survey, "Retirement and Mortgages," by national mortgage banker American Financing, found 44 percent of Americans between the ages of 60 and 70 have a mortgage when they retire, and as many as 17 percent of those surveyed say they may never pay it off.
Kevin O'Leary, an investor on “Shark Tank” and personal finance author, said in 2018 that the ideal age to be debt-free is 45. It's at this age, said O'Leary, that you enter the last half of your career and should therefore ramp up your retirement savings in order to ensure a comfortable life in your elderly years.
Rather than paying out a death benefit to your beneficiaries after you die as traditional life insurance does, mortgage life insurance only pays off a mortgage when the borrower dies as long as the loan still exists. This is a big benefit to your heirs if you die and leave behind a balance on your mortgage.