Do you have enough life insurance coverage?
If you passed away would your family have enough money to get by, or would they struggle financially? Would they be able to live in the same house and at the same standard of living, or would they need to downsize?
These are important questions to ask and why you should make sure you buy enough life insurance coverage. Life insurance policies exist to help provide money for these situations, and there is one particular life insurance policy called mortgage life insurance that is specifically designed to repay your mortgage in the event of your death, disability or some incapacitating disease. But what is it, and do you need it?
What is Mortgage Life Insurance?
Like the name implies, mortgage life insurance, or mortgage protection insurance, is there to repay your mortgage in the event you die or are disabled and can no longer make payments. You will be offered mortgage life insurance when you fill out loan papers for your house and sign your mortgage. You can decline this insurance when it is offered, but if you choose to decline this insurance you will be required to sign several forms and waivers verifying your decision to decline the coverage.
Why do you have to sign waivers to decline mortgage life insurance coverage? Officially, to designate that you understand the risks associated with having a mortgage and the possibility of dying and not being able to pay it off. But mostly it is there to give you second thoughts and persuade you into buying it. In truth, mortgage life insurance benefits the lender more than it benefits the borrower.
Is mortgage life insurance worth the cost? As with everything, there are pros and cons. Let’s take a look and you can decide if you need mortgage life insurance or not.
Advantages of Mortgage Life Insurance
Mortgage life insurance gives your family peace of mind. In the event of a terminal illness or your untimely death, the mortgage life insurance policy covers your loan to the bank and your mortgage is repaid in full. The benefit is knowing that your house will be fully repaid and you will not have to worry about your family struggling to make mortgage payments.
Another advantage of mortgage life insurance is near universal coverage with minimal underwriting – there is often no medical examination or blood sample required at the inception of your policy. Thus it can be a valuable insurance policy option for the homeowner that has serious preexisting medical conditions that would preclude a normal life insurance policy.
Sounds good, right? So why doesn’t everyone choose to buy mortgage life insurance?
Disadvantages of Mortgage Life Insurance
In general there are four reasons why there are better options than mortgage life insurance: it is a decreasing benefit; it benefits the lender, not the borrower; you have no control over the policy payout; and it can be more expensive than a comparable term life insurance policy.
Mortgage life insurance is a decreasing benefit. Mortgage life insurance premiums are a fixed rate, but the payout is generally fixed to your mortgage principle*. So the value of the policy decreases as you repay your mortgage. Buying a standard term life insurance policy gives you a fixed premium and a fixed payout. You know exactly how much will be paid out in the event you or your loved one dies.
*Some newer mortgage protection or mortgage life insurance policies pay out at a fixed rate for the first few years, then decrease as time goes on, and some pay out at a fixed rate. Read the terms closely before making a purchase.
Mortgage life insurance policies benefit lenders more than the insured party. It is important to note that your family will not actually see any of this money from this insurance policy. The mortgage lender is the policy beneficiary and if you die the bank will receive the life insurance payout which will be used to repay the mortgage in full. The benefit for your family is a house paid in full.
You have no control over where the life insurance settlement goes. As mentioned in the above paragraph, the life insurance settlement is automatically sent to the bank to cover the terms of the mortgage. Not having a mortgage may give you peace of mind, but that may not actually be the best use of your funds at the time. A traditional term life insurance policy gives you better control over how to use your life insurance settlement. For example, if you have a lot of debt at a higher interest rate it may be more prudent to repay that debt before repaying your mortgage.
Mortgage life insurance is expensive for the amount of coverage. The premiums you pay at the beginning of your mortgage are probably in line with the amount of coverage you are receiving, but as time goes on you receive much less coverage for the money. You are more than likely better off going with a term life insurance policy and getting sufficient coverage to pay off your home in full if that is your goal. Be sure to get multiple life insurance quotes before purchasing your life insurance policy.
Should you buy mortgage life insurance?
We recommend term life over mortgage life insurance for most people. With few exceptions, term life insurance offers better protection than mortgage life insurance. To find out how much life insurance you need, please visit the Mint.com insurance finder.
Why most people should skip mortgage life insurance. Overall, mortgage life insurance doesn’t seem like a great idea for most people. You pay the same amount of money each month for a decreasing benefit and you have no control where the payout of the policy goes or how it is used. For most people, a traditional term life insurance policy is a better option than mortgage protection insurance due to a potentially larger payout, lower premiums, and the flexibility of using your life insurance settlement how and when you want.
Why some people should consider mortgage life insurance. That said, there are actually several reasons why people would want mortgage life insurance. The primary benefit of mortgage life insurance is coverage with minimal health screenings; you may not be required to submit to a medical examination before purchasing a mortgage protection policy. If you have trouble purchasing a term life insurance policy, then applying for a mortgage life insurance policy when you buy your house is a good idea.
Should you buy mortgage life insurance? That will depend upon the amount of your loan and the value of your house, your family’s assets and your general health. In addition to these factors you must consider the term of your loan and the possibility that if you rewrite your mortgage or the bank sells you loan, you’ll have to rewrite the mortgage insurance policy as well. The most important thing to remember is that you buy enough life insurance to meet all your financial needs.
Do Your Research Before Buying Mortgage Life Insurance
Be sure to read the fine print and fully understand both your life insurance policy and the mortgage life insurance policy being offered to you before you accept or decline it. Your loved ones will appreciate your thoughtfulness.