Mortgage Life Insurance
Mortgage life insurance is an insurance policy specifically designed for homeowners who owe money on a mortgage loan. If the insured individual dies, the policy pays out the remaining loan balance, leaving survivors with a paid off home:
Death benefit: Mortgage life policies typically have a declining death benefit. As you pay down your mortgage loan over time, your loan balance decreases, and the policy accounts for that decreasing balance.Beneficiary: Your lender is typically the beneficiary of a mortgage life insurance policy. In other words, the lender receives the death benefit. Some policies pay any remaining amount—above the loan balance that you pay off—to beneficiaries that you choose, but traditional mortgage life only pays the lender.
What Makes Coverage Appealing
When you get a loan, lenders may promote mortgage life insurance, also known as mortgage protection insurance, as a part of the borrowing process. What’s more, insurance companies may find your name through public records and send you offers after you buy your home. Easy to qualify: It’s easy to get approved for most mortgage life policies. But that’s not necessarily as good as it sounds (more on that below). Standard insurance policies typically require a review of your medical history, a urine sample, and a visit with a paramedical professional to get coverage. If you have serious health problems, you might be denied or asked to pay higher rates. But mortgage protection insurance may be “guaranteed issue” insurance, requiring just a few screening questions. You’re likely to get approved as long as you meet basic criteria and have no life-threatening health issues. That’s it—easy approval is the primary benefit of buying coverage tied to your home loan. If you have health problems, these policies may be attractive. Still, weigh that benefit against other options available.
Why Explore Alternatives
Mortgage life insurance is helpful in some cases, but you need to evaluate alternatives and look at the big picture before making a decision. It may make more sense to buy insurance on your own. A standard term life insurance policy can also protect your loved ones and pay off any mortgage debt (and more). The goal in life isn’t just to leave your family with a paid off mortgage. Instead, it’s ideal to provide for a financially secure future. The mortgage is just one piece of that puzzle, and it’s wise to use solutions that can help solve multiple problems and provide flexibility. Here’s why mortgage protection isn’t always as great as it sounds:
Cost: Because mortgage life is available to almost everybody, it costs more. You might not look forward to a medical review with an insurance company, but going through that process might allow you to pay less each month or year for the same coverage. Especially if you’re healthy, costs should be significantly lower. Guaranteed issue policies are priced to account for a segment of customers who are unhealthy and more likely to die with insurance in place. Control: With mortgage protection policies, the lender is typically the primary (or only) beneficiary. That’s fine if your only financial need is to pay off the mortgage. For most families and couples, other needs exist, and those might even be higher priorities. For example, if your mortgage payments are affordable, it may make sense to use insurance proceeds for education, retirement, or to pay off high-interest-rate debts. With your own policy, your beneficiaries can choose where to put the money.
Policies You Control
The most straightforward alternative to mortgage protection insurance is a term life policy. You can buy insurance for a length of time that matches your mortgage, and stop paying premiums if you no longer need coverage. For example, if you get a 30-year fixed-rate mortgage, a 30-year term life policy can help you ensure that your loved ones have a way to pay off the loan. 15- and 20-year options are also available from most insurers. With standard term policies, the death benefit is level—it does not decrease over time. While that might seem to leave you overinsured as you pay down your loan balance, it’s worth comparing costs against a mortgage protection policy. You still might pay less, and it’s hard to have “too much” money after a breadwinner dies. With mortgage protection policies, you continue to pay the same premium, even though the death benefit decreases every year. If you really just want to focus on your mortgage, it’s possible to buy decreasing term insurance (which may help prevent you from being overinsured). Likewise, you can shop for policies that allow you to change the death benefit and lower your premiums periodically. Ask how flexible each insurer is about cutting the death benefit.
Not PMI
It’s critical to understand that mortgage life insurance is not the same as private mortgage insurance (PMI). PMI protects your lender if you default on your loan, and it’s typically required when you make a down payment of less than 20%. Mortgage protection insurance, on the other hand, protects your beneficiaries. It can prevent default from happening because it pays off your loan.
