Mortgage protection insurance is a life insurance policy that is designated and used to pay off your mortgage in the event of your death. It typically provides coverage for the same amount of time as your mortgage. Subsequently, if you take out a mortgage for 15, 20, or 30 years, your mortgage protection insurance policy needs to be the same or longer than your mortgage.
If you should die during the term of your insurance policy, your insurance company pays the death benefit directly to your beneficiary who can then pay off the mortgage. It’s important to note, however, your beneficiary can use the death benefit for any reason they choose, so it’s critical that you and your beneficiary agree on using the death benefit to pay off the mortgage.
You can also assign the insurance policy to your lender as their interest appears. In this scenario, the insurer would pay the lender the balance of the mortgage and the beneficiary would be paid any funds that are left over. This type of insurance does not cover your monthly payments if you cannot work due to a short or long-term disability.
In almost every situation, Term Life Insurance is used for the insurance coverage because it is the most affordable product available.