There are a variety of mortgage insurance products on the market. Some of these products claim to help you to save for a home. Some of these products are geared to make your payments in the case of disability, ill health or death.
In most cases, if your lender offers you mortgage insurance, it will be a type of mortgage life insurance. This insurance will ensure that your mortgage is paid off in the case of the death of you or your spouse (as long as you are both named on the mortgage itself.)
In general, you will get a better deal on this kind of insurance if you buy it from an insurance company directly. The insurance packages that are offered to you by your lender are normally a more expensive insurance with lesser benefits. So, although your lender may try to talk you into life insurance for your mortgage, you are better off to say no.
Frankly, the kind of offered by your lender can be more than 3 times as expensive as buying a term life insurance policy for the same amount and the net effect is the same: You will have the money to pay off your home in the case of a death. However, if you have to buy additional insurance for both of you in order to fully ensure your home in case of death, you should compare the costs of two life insurance policies against the cost of the single insurance through your lender.
What if you have a bad credit history and your lender insists on insurance as a condition of your loan? Then, you may have to take the insurance. However, this insurance is likely to be different than mortgage life insurance. In all likelihood, this will be private mortgage insurance, and you'll usually be required to get it if you don't have a full 25% down for your home. Now while this kind of insurance may allow you to buy your home, it is an additional cost and it will not benefit you.
You are taking out insurance that will benefit your lender, in case you default on the mortgage. This provides your lender with greater security, and may allow you to get a mortgage that you wouldn't otherwise be able to get. However, as soon as you can, renegotiate to get rid of this insurance. It is pure overhead for you.