Mortgage redemption insurance

Mortgage redemption insurance
See also

Mortgage redemption insurance is a variant of decreasing term insurance on the life of a party that is obliged to make the mortgage payments. If the insured dies, the mortgage balance is transmitted to the lending institution by the insurance company. As a result, insured's survivors gain claims-free title to the mortgaged property. This specific insurance type is often recommended during the lending process. Mortgage redemption insurance protects both survivors of the insured and the lending institution[1].

It is typical for the mortgage loans that each payment of equated monthly installment results in decreasing the outstanding principal. The insurance might be constructed in such a way that the benefit amount at any point in time is equal to the amount of owed principal. In this example, the length of the mortgage and the policy term are corresponding[2].

Joint mortgage redemption insurance

One of the variants of the described policy is the joint mortgage redemption. It is used to cover more than one person's life, usually two people. This variant is dedicated to people who finance the loan using their joint income and who own the property together[3].

Comparison of policy types

There are two main policy types considered when taking a mortgage:

  • mortgage redemption insurance,
  • decreasing term life insurance.

These two insurance types often appear identical to the consumers and are commonly confused. The main difference between the two types is wh the beneficiaries are. The beneficiary of mortgage redemption insurance is the mortgage holder, most likely the lending institution. Survivors of the insured receive the benefit in the form of a title to the mortgaged property. It is different with decreasing term life insurance where survivors of the insured are the beneficiaries. Survivors can either invest received proceeds or retire the mortgage. When the mortgagor dies, the responsibility for loan payments is often transmitted to the survivors who may choose to continue the payments or use the received proceeds to retire the mortgage. With the mortgage redemption insurance, survivors have limited flexibility as they are indirect beneficiaries only[4].

Footnotes

  1. Angell, R. J., Eatman, J. L. 1982, 14.
  2. Kutty, S. K. 2008, 350.
  3. Kutty, S. K. 2008, 350.
  4. Angell, R. J., Eatman, J. L. 1982, 14-15.

References

Author: Magdalena Wojslaw