First of all, what is Mortgage Life Insurance?
Mortgage Life insurance is an insurance policy designed specifically to pay off your mortgage in the event that you, the mortgage borrower, die before the mortgage is completely paid off.
Don’t confuse mortgage life insurance with private mortgage insurance or PMI. They are different animal. But both are equally hurtful to your wealth accumulation plan.
Mortgage life insurance are somewhat similar to traditional life insurance, but different in very significant ways. Both traditional life insurance and mortgage life insurance can provide a means of paying off your mortgage. With either type of insurance, you pay regular premiums to keep the coverage is in force.
A traditional life policy pays out death benefit when the borrower dies. But a mortgage life insurance policy doesn't pay out unless the borrower dies while the mortgage itself is still in existence. And the death benefit goes to the mortgage lender, not the family members as in traditional life insurance.
Why would you buy life insurance to pay money to your mortgage lender, and not your family?
With mortgage life insurance, your mortgage lender is the beneficiary of the policy instead of beneficiaries you designate. When you pass away, the death benefit pays out to your lender to pay off the balance of your mortgage, so you family does not have to worry about the mortgage.
Well, it’s true that mortgage is taken care of for your family. But wouldn’t it be better for your loved ones to receive the death benefits and decide how they want to use that money and decide whether to pay off the mortgage. There may be more pressing needs than paying off the home, such as final expenses, private school or college tuition, etc.
Let’s look at mortgage life insurance more closely.
There are two basic types of mortgage life insurance: decreasing term, where the size of the policy decreases as the balance of the mortgage is being paid down until both reach zero; and level term, where the size of the policy does not decrease.
With a level premium, your premium stay the same for the duration of the policy. This feature sounds great – until you realize that while you’re paying the same premium, your coverage is shrinking as you pay off your mortgage over the years, which also means the potential payout decreases as well.
Some insurance company offer to return your premium if you pay off your mortgage before you die. Does this make up for the fact that your coverage declines although you keep paying the same amount? Not really.
After 15 or 30 years, when your mortgage is paid off and you get your premiums back, they’ll be worth far less because inflation will have eroded their value.
You also will have lost the opportunity to invest what you saved from purchasing cheaper life insurance instead of mortgage protection insurance. That’s 15 or 30 years of potential compounding returns down the drain.
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Traditional life insurance is often more affordable and allows you to name your children or spouse as the beneficiaries rather than the mortgage company.
The premium of the mortgage life insurance is usually lumped into the home loan, which means you are paying finance charges on the premium, which is already expensive.
Also, a mortgage life insurance stays with the house and it is not transferable. Now you’re stuck.
Basically, a mortgage life insurance is a waste of money. Any traditional life insurance (whether term or permanent) can offer much better level of protection for considerably smaller premiums.
A traditional life insurance maintains its death benefit value throughout the lifetime of the policy, and the death benefit pays out to your family whether or not your mortgage is paid off. It gives your family option to pay off the mortgage or use the money for more urgent things. And if the mortgage is paid off when you pass, that’s even better, your family can have all the money to use for whatever is important.
Mortgage life insurance is extremely profitable for mortgage lenders and/or insurers, but totally obsolete to borrowers. Remember, there are two lifespans to consider - your lifespan and the mortgage’s.
Mortgage protection insurance companies might try to convince you that you need their product in addition to life insurance. They’ll tell you that paying off the mortgage will eat up a major portion of your life insurance proceeds, leaving much less for your survivors to meet their basic living expenses.
If you are concern you don’t have enough life insurance, you should buy more. It will likely cost less to increase that coverage than to purchase a separate mortgage protection policy.
If you cannot qualify for traditional life insurance because of health reason, you would still be better off with a no-medical-exam (also called “guaranteed issue”) term policy with level premiums and a level death benefit. These policies cost a bit more, but at least you and your family will be protected.
You should consider mortgage life insurance only as a last resort.
Related article: Protect Your Home with Life Insurance