Coverage

• The purpose of mortgage protection insurance is to insure the life of the borrower. Generally, upon the death of the borrower, the insurance pays off the remaining loan balance. Some mortgage protection policies also make the payments if the insured suffers a temporary or permanent disability. In addition, the policy may have a provision for involuntary unemployment, in which case the insurance provider keeps the mortgage payments current until the borrower finds a new job.
  
  

Paying Premiums

• Life and mortgage protection insurance premiums may be included and financed as part of the total loan package. The lender may take a portion of each mortgage payment and set it aside to pay premiums on the insurance policy. This type of arrangement provides security for the lender, knowing the insurance is up-to-date.
  
  

Removing Protection

• In the insurance industry the term "private mortgage insurance," generally referred to as PMI, amounts to life insurance on a borrower. New regulations, which went into effect as part of the Homeowner's Protection Act (HPA) of 1998, permits mortgage holders to request termination of the required insurance after gaining 22 percent equity in the residence. The standard among lenders has been if the borrower cannot afford a 20 percent down payment, mortgage protection life insurance is required.
  
  

Regular Life Insurance

• Individual life insurance policies in amounts sufficient to cover a mortgage loan balance if the policyholder dies, are generally inadequate for the sake of the lender. This is because the policyholder could let the coverage lapse by failing to pay premiums promptly. In other words, the lender prefers a policy it can monitor.
  
  

Consideration

• According to the Federal Trade Commission, it is illegal in the United States for a lender to incorporate insurance into a loan without the applicant's permission. Although the FTC calls credit insurance optional, a lender willing to finance a mortgage may adamantly insist that the borrower purchase mortgage insurance as a prerequisite for obtaining a loan. In such circumstances, the borrower has no choice if he wishes to assume a mortgage.