Q: How does mortgage insurance assist the survivors of a deceased policy holder when they live in one of the homes that are covered under the policy? I guess what I really want to know is "Will mortgage insurance protect my family if I pass away?"
A: It's not clear what you mean by "mortgage insurance", and there can be some confusion in how the term is used.
What is mortgage insurance?
Mortgage insurance -- most commonly called "private mortgage insurance" (PMI), is a policy required when a home is purchased using a conventional loan with less than a 20 percent down payment (or when refinancing an existing loan leaves less than a 20 percent equity stake).
The policy is paid for by the borrower but protects the lender in the case of default, covering at least a portion of the potential loss. There is no benefit paid to the borrower.
When the mortgage holder dies…
This is the case even if the borrower on the mortgage should die; usually, the property passes to his or her estate, the monthly payments are made, and the policy to protect the lender remains in force. If there is a will, the executor becomes responsible for making payments on behalf of the estate, and this continues until the estate is settled, and the property transferred to a new owner or sold.
Regardless, provided the payments are made by someone responsible for the mortgage and policy remains in place.
If payments are not made (the loan goes into default), foreclosure proceedings begin and the lender will eventually be paid from this mortgage insurance policy for his costs of foreclosure (legally reacquiring the property and preparing it to be sold).
"Credit life insurance" is different
There is a kind of "credit life" insurance, often marketed as "mortgage insurance," and this is where the confusion of terms can come into play. These policies are actually life insurance policies that are often written for the face amount of the mortgage. If the borrower has such a policy and passes on, the policy pays out.
However, such policies may directly pay the lender; that is, the survivor(s) gets nothing but a paid-off mortgage. Because of this, it's often a better idea to simply take a low-cost term life policy payable to the survivor(s), who can then pay off the mortgage or not as needs dictate.
Sometimes, this "credit life insurance" is coupled with the mortgage payment as an add-on charge.
If there is a form of credit life insurance policy in force on the property, you'll need to review it carefully to see under what circumstances a claim will be paid. If two borrowers are on the loan, for example, it is not clear if the policy would pay a claim, since at least one party is still alive. If it does apply, the survivor would generally find themselves living in the home, mortgage free.
FHA-backed loans also carry mortgage insurance. The FHA runs a self-insuring pool that protects lenders against loss. FHA mortgage insurance isn't described as PMI, but as MIP, for mortgage insurance premium.
Related: Learn what PMI is costing you and when you can cancel it
