Mortgage life insurance is a form of insurance specifically designed to protect a mortgage. If the policyholder was to die while the mortgage life insurance was in force, the policy would pay out a sum that would be just sufficient to repay the outstanding mortgage.
When the insurance commences, the value of the insurance coverage must equal the capital outstanding on the mortgage, and the policy’s termination date must be the same as the date scheduled for the final payment on the mortgage. The insurance company then calculates the annual rate at which the insurance coverage should decrease in order to mirror the value of the capital outstanding on the mortgage. Even if the policyholder is behind on mortgage payments, the insurance will normally adhere to its original schedule and will not keep up with the outstanding debt.
Some mortgage life insurance policies will also pay out if the policyholder is diagnosed with a terminal illness from which the policyholder is expected to die within 12 months of diagnosis. Insurance companies sometimes add other features to their mortgage life insurance policies in order to reflect conditions in their country’s domestic insurance market and their domestic tax regulations.