Can You Use Mortgage Protection Insurance to Stop Foreclosure?

Mortgage protection insurance could prevent foreclosure in some situations.

During tough economic times or when experiencing a financial emergency such as the loss of a job, a homeowner may find himself facing foreclosure. If he purchased mortgage protection life insurance when he took out his mortgage, it may only help him escape his predicament in a worst-case scenario. However, other forms of life insurance could provide some of the cash he needs to help him keep his home.

Identification

Mortgage protection insurance is a form of life insurance that is tied to a home mortgage. Its purpose is to pay off the mortgage in the event of a breadwinner's death, allowing her family to remain in the home. A homeowner typically must purchase a mortgage protection policy within 24 months of the property settlement date if she wishes to carry the coverage. The amount purchased is based on the balance of the mortgage, and the policy term also coincides with the length of the mortgage term.

Stopping Foreclosure

It is possible that a mortgage protection policy could stop a pending foreclosure. If foreclosure proceedings have already commenced and the policyholder passes away, his survivors could use the proceeds to pay off the mortgage balance. This would likely stop any foreclosure proceedings, assuming the process is not too far along to reverse. The survivors could take full ownership of the property without the need to make mortgage payments in the future.

Considerations

In certain situations, a mortgage protection policy may not stop foreclosure, especially if the policyholder dies in the very early stages of the mortgage. Life insurance policies typically contain a contestability clause, which allows the insurance company to avoid paying the claim if death occurs within a specific time frame, normally two years from the issue date, and if the cause of death is a specific non-covered event such as suicide. If the insurer successfully contests the claim, the survivors won't receive the insurance proceeds.

Alternative

While mortgage protection insurance may provide foreclosure prevention benefits if the policyholder dies, other forms of life insurance could provide a living benefit as well. Permanent life insurance plans such as whole life, universal life and variable life build cash value over time. If the policyholder falls behind on her payments, she can access the accumulated cash in the form of a low-interest loan that does not need to be repaid. She can use the money for any purpose, including applying it to her mortgage payment.

References

• Insure.com: Mortgage Protection Insurance Could Save a House, and More
• Life Insurance Selling: The Case of the Contested Contestability Period
• New York Life: What You Should Know About Policy Loans