Mortgage Life Insurance: Who Gets the House?

Dear Insurance Adviser,

If you buy life insurance and your mortgage is the beneficiary, does this mean the mortgage company gets your house when you die?

- Carole

Dear Carole,

No. When the mortgage company is the beneficiary of your life insurance, it means the policy's proceeds go toward paying the mortgage upon your death. If the mortgage life insurance coverage amount is adequate to cover the loan in full, then your survivors would own the home free and clear of any mortgage.

To give your survivors more options, it's better and smarter not to make the mortgage company the beneficiary of your life insurance.

When your survivors are the beneficiaries of your life insurance, they may pay off the mortgage if they so choose. But they are not locked in to doing so. They may need the proceeds to help cover more pressing needs, like groceries, medical bills, etc. Or, they may prefer to have the peace of mind of investing the proceeds for an emergency fund while continuing to make the monthly mortgage payments.

Another possibility is that your interest rate on your mortgage may be very low in relation to current marketplace investment returns. Your survivors might prefer to attempt, through investments, to use the insurance proceeds to make more money than the mortgage payments are costing them. The tax deductibility of mortgage interest is something to consider as part of that equation.

In closing, here's a tip about buying mortgage life insurance. If you are a healthy nonsmoker, I would say don't buy insurance from the mortgage company to cover the loan, for two reasons:

The mortgage company would be the sole beneficiary.
Insurance rates are typically 50% to 100% higher than what you'd find in the open market.

However, if you find it difficult to get life insurance in the open market because of health issues, definitely try qualifying for the insurance sold through your mortgage company.

Good luck!

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