If a family’s primary earner dies, will they be able to finish paying off the mortgage on the family home without his or her income? A mortgage life insurance policy, or mortgage protection, removes this from your concerns, as it pays off the remainder of the outstanding mortgage on your home in the event of your death. On the face of it, the idea seems attractive. In this article, I’ll explain why it may not be the best policy to protect your family from mortgage expenses if you pass away, one feature that you definitely want in in a mortgage insurance policy if you do buy one, and the one financial institution from which you definitely don’t want to buy mortgage insurance.
When it comes to protecting your family, more has to be better, right? Remember though, that your mortgage payment is only a small fraction of your monthly expenses. Another way to approach it is to look at how much total income they would have to replace to maintain their standard of living if you were gone, and then buying enough insurance to meet that need. The fact is that paying off the mortgage entirely might not even be the smartest thing to do financially– what if your family wanted to sell the house? At any rate, putting funds from an insurance payout towards other expenses might make more sense. Mortgage life insurance would remove some flexibility in this case. Paying the same premiums into a term life policy would restore that flexibility.
Rather than purchasing mortgage life insurance cover, really consider purchasing a return of premium term life policy. The policy can be purchased for the same term as the mortgage itself such as 20, 25 and 30 year plans. If you outlive the term policy, which statistically is likely, you get all your premiums back, without a tax liability. By the way, ‘mortgage term life’ insurance is something different altogether: it is like MI, and is sold as a cheaper alternative to it, but if you do not die within a given time, NO benefit is paid and the mortgage is not paid off either. Buyer beware.
If you still decide that you want mortgage insurance, what is the one place you don’t want to buy it? You will almost certainly be offered it by the bank from which you are taking the mortgage loan, but do yourself a favor and decline it. Get a return of premium term life policy instead. In addition to the usually higher mortgage life insurance rates, there are several other reasons why:
**What if you renew your mortgage with a different bank than the one with which you took out the original loan? You’ll have to reapply for new mortgage insurance if you want to continue, and it might be much more expensive at that time to do so. The portability aspect of a term life policy, which is in effect regardless of where you live, avoids this problem.
**It’s probably not a good idea to pay a fixed amount each month on a mortgage that is getting smaller over time.
**Think about it: you’re actually paying into a policy to ensure that the bank will be paid off should you die. In a way, the bank is your beneficiary! With a term life policy, your heirs decide what is the best plan for the money that you leave them, and as noted earlier, that won’t always be paying off the mortgage.
**Mortgage insurance is usually group coverage based on the ‘average health’ of all the policyholders in the group. If you are in good health, you’ll essentially be rewarded for it by getting a policy based on that fact.
So again, level term life policies sold by insurance agents and brokers might require a little more effort on your part, but taking advantage of the the ‘convenience’ of mortgage life insurance is probably a bad move when you take a closer look.