Do you need mortgage life insurance?
If you have purchased a house, you were offered mortgage life insurance, which is also known as mortgage protection insurance. The basic idea behind mortgage life insurance is that it will pay off your mortgage when you die. While that sounds like a good idea, mortgage life insurance is usually not the best life insurance option for most people. Shop around and you will probably find term-life insurance is the best form of life insurance for many situations.
Four Reasons Why Mortgage Life Insurance is Not a Good Idea
Your mortgage broker will give you many reasons why you should buy mortgage protection insurance, but let’s be clear on one thing – regardless of what anyone else tells you, mortgage life insurance is there for the benefit of the lender, not you. In fact, if you want to decline mortgage life insurance you will probably have to sign multiple waivers and listen to the reasons why you should opt for purchasing mortgage life insurance. This is designed to get you to change your mind.
Here are four reasons why you don’t need mortgage life insurance:
1. Mortgage life insurance is a decreasing benefit. Mortgage life insurance benefits are designed to pay off the outstanding balance on your mortgage, so the pay out benefits decrease as you pay down the principle on your loan. Some policies have a set payout for the first five years, but decrease after that. If you buy this policy, your payments remain the same while the benefit decreases.
2. The lender is the beneficiary. If you die the money goes straight to the lender. Your heirs do not receive one penny of it. It is true they will have a home that is paid in full, but that may not be the best use of the funds for their situation at the time.
3. You don’t get to choose how or where the funds are spent. The money goes straight to the mortgage. Your heirs may have higher interest debts or other needs that are more important than paying off the mortgage right away. Mortgage life insurance does not give them the option to choose.
4. Mortgage life insurance can be expensive. Mortgage life insurance premiums are often on par with term life insurance premiums at the policy inception, but remember, this is a decreasing benefit and you end up paying more for your coverage as time goes on.
Comparing Term Life Insurance to Mortgage Life Insurance
Looking at the four disadvantages listed above, term life insurance appears to be a clear winner almost every time, provided you buy encough life insurance to cover all your needs.
1. Term life pays out at a fixed rate and is not a decreasing benefit. Your monthly premiums and the payout will remain the same as long as the original policy is in place.
2. Term life beneficiaries are named in the policy. You can designate anyone to be the beneficiary of your term life policy; it is not automatically assigned to your bank, mortgage lender or other creditors.
3. Your beneficiaries choose how to use the money. Flexibility is the key to term life insurance and your beneficiaries do not have to immediately repay the mortgage upon your death.
4. Term life insurance rates are often cheaper for the amount of coverage. Life insurance premiums between the two policies are often similar near the beginning of your mortgage, but as your outstanding loan balance decreases, you are paying more for less coverage. Your term life insurance premiums will remain the same.
When it Might Make Sense to Purchase Mortgage Protection Insurance
The main benefit to mortgage protection insurance is that it can often be purchased with minimal underwriting and no medical examination or blood tests. This makes mortgage life insurance a good option if you have a pre-existing medical condition and may not be eligible for affordable term life insurance. You can also look into guaranteed issue life insurance. Note: Read the terms and conditions thoroughly before signing your paperwork to fully understand your coverage.
Term Life vs. Mortgage Life: Term is the Winner
As you can see, term life insurance almost always trumps mortgage life insurance. As with every money-related issue, be sure to read and understand your policy before signing and shop around for insurance rate quotes before purchasing any insurance product.
Note: Veterans should consider other available options as well, including the Veteran’s Mortgage Life Insurance Program, which you may be eligible for. In all cases be sure to buy enough life insurance for your needs.
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