Do you have enough life insurance coverage?
What would happen if you passed away today, tomorrow, or next year? Would your family have enough money to get by, or would they struggle financially? Would they be able to stay in your current home with the same standard of living, or would they need to downsize? Would the loss of your income alter the course of their lives, making just getting by a daily challenge?
These are important questions to ask yourself as you determine whether your life insurance coverage is sufficient. Buying a life insurance policy is only part of what is required to protect your family. If you want to leave them in a situation where they can continue to thrive in your absence, you have to buy enough life insurance to cover your income, pay for future expenses like college and retirement, and even pay for the home you live in.
Life insurance policies exist to help provide money for these situations, and there is one particular life insurance policy that was created specifically to repay your mortgage in the event of your death, disability or some life-altering disease. Called mortgage life insurance, this type of insurance can pay off your mortgage if you meet an early death or your health impacts your ability to earn.
Keep reading to learn more about mortgage life insurance coverage, how it works, and what it could mean for your family.
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 become unable to work. Most of the time, you are offered mortgage life insurance when you fill out loan papers for your house and sign the paperwork to begin 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 opt out.
Why do you have to sign waivers to decline mortgage life insurance coverage? Officially, this paperwork was created with the intention of proving you understand the risks associated with having a mortgage. Mostly, however, the paperwork was created to give you a moment to stop and think about your situation – and potentially persuade you into buying the coverage.
Is mortgage life insurance worth the cost? As with anything else, there are pros and cons that come with purchasing this type of coverage. While it may be an ideal solution for some families, others don’t need mortgage life insurance at all.
Before we go any further, let’s discuss both the advantages and disadvantages that come with buying mortgage life insurance. Also, we’ll discuss some alternative types of coverage that might make even more sense.
Advantages of Buying Mortgage Life Insurance
Mortgage life insurance gives your family peace of mind. In the event of a terminal illness or your untimely death, your mortgage life insurance policy will cover your loan amount so your family doesn’t struggle. The biggest benefit of having this coverage is knowing that your house will be fully repaid no matter what happens with your health.
Key Advantages that Come with Mortgage Life Insurance
One of the biggest advantages 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 any homeowner with serious preexisting medical conditions that would prevent them from buying a traditional life insurance policy.
Here are a few of the other key advantages mortgage life insurance can offer:
Your family will have a mortgage-free home if you die or cannot work due to illness or injury. If your mortgage payment makes up a substantial part of your budget each month, it’s smart to worry how your family might cover the cost if you were to die or become incapacitated. With a mortgage life insurance policy in place, you won’t have to worry or wonder what might happen. If you die or become gravely ill or unable to work, your mortgage life insurance policy will become active and pay off your entire loan.
You don’t have to die to take advantage of this coverage. With some exceptions, most traditional life insurance policies will not pay out unless you die within your coverage period. Most mortgage life insurance policies, on the other hand, offer coverage that works if you become disabled or unable to work. This fact makes this coverage slightly more versatile than a traditional term or whole life insurance policy.
Sleep well at night knowing your family is protected. Like we said before, the biggest advantage this coverage offers is the fact that you don’t have to worry about your family having a place to live if you die or cannot work. With your mortgage paid off, your family will always have a place to live provided they can afford the property taxes and insurance each year.
Disadvantages of Buying Mortgage Life Insurance
Generally speaking, there are four reasons why mortgage life insurance isn’t a good deal for every family. Most important of those factors is the fact that you can get a comparable term life insurance policy that will cover the cost of your mortgage and provide a cash benefit for your family – and all for around the same price or even less in most cases.
Key Disadvantages of Mortgage Life Insurance
Here is a summary of each of the disadvantages that come with this type of coverage:
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*. Because of this, the value of the policy decreases as you repay your mortgage. Buying a standard term life insurance policy, on the other hand, 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?
While any type of policy is better than nothing, mortgage life insurance doesn’t seem like a great idea for most families who need life insurance coverage. Generally speaking, mortgage life insurance requires you to pay the same amount of money each month for a decreasing benefit. Plus, 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.
With that being said, there are still a handful of reason why people would want mortgage life insurance. The primary benefit of mortgage life insurance is that you can generally get coverage with minimal health screenings. Meanwhile, 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.
Whether or not you should buy a policy really depends 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 your loan, you’ll have to rewrite the mortgage insurance policy as well. The most important thing to remember is that you need to buy enough life insurance to meet all your financial needs – not just paying off your home.
Why Most Families Would Benefit from a Term Life Insurance Policy Instead
The idea of having a mortgage-free home if you die or cannot work may sound attractive, but that doesn’t mean mortgage life insurance is the best way to achieve this. By and large, most people would be better off purchasing a term life insurance policy big enough to cover their mortgage and provide for every other need that might arise.
Here are five reasons you should seriously consider term life insurance instead of mortgage life insurance:
Term life insurance is usually cheaper. Most of the time, term life insurance costs considerably less than the mortgage life insurance policies you’re offered when you take out a home loan. If you want to find out how much you might pay, fill out the form at the bottom of this page for an instant quote.
You’ll get a fixed payout. With traditional term life insurance, you’ll received a fixed cash payout regardless of when your family files a claim. Since mortgage life insurance only pays off your mortgage, your benefit will naturally decline as you pay off your loan.
You can get a policy big enough to cover your mortgage, replace your income, and provide for your family. If paying off the family mortgage is a priority, you can buy a term policy big enough to pay off your home and provide a cash benefit to your family.
You won’t be penalized for paying off your mortgage faster. With mortgage life insurance, your benefit goes down with each month you pay down your mortgage. In that respect, paying your house off early exacts a penalty that could cost your family money. With traditional life insurance, one the other hand, you’ll get a set benefit that won’t change if you decide to pay off your home early.
Term life insurance provides your family with cash they can use in whatever way seems fit. The biggest benefit you’ll get with traditional life insurance is the fact that your family will receive cash they can control. If they want to use the funds to pay off your mortgage, they can certainly do so. But since you may not know how your family’s needs might change in the next five, ten, or twenty years, it’s nice to provide your family with cash they can use as they please.
Get a Term Life Insurance Quote
Once you take a closer look at the benefits and drawbacks of mortgage life insurance, it becomes pretty apparent that a larger, term life insurance policy might be a smarter option for your family. If you want to protect your family from the unknown, it’s smart to begin shopping for a policy as soon as you can.
The form below will provide you with a general idea of how much you might pay depending on your general health, location, and the amount of coverage you need. Don’t wait to provide your family with the protection they’ll rely on in the event of your death; get instant life insurance quotes today.