Mortgage life insurance can protect your family from unmanageable debt in the event of your death. While it can be a godsend in certain instances, it also comes with some notable drawbacks that make it less valuable for certain people. Here are the pros and cons of mortgage life insurance, along with some tips for protecting your loved ones from unwieldy debt.
What Is it?
Mortgage life insurance is essentially life insurance designed to protect your loved ones from unmanageable mortgage payments if you or the primary breadwinner is no longer around to provide income.
It works similarly to other kinds of term life insurance: You purchase a policy and pay regular monthly or annual premiums. At the conclusion of the policy term, your coverage ends. If you happen to die during the term of your mortgage life insurance policy, a monetary death benefit will be paid to your stated beneficiaries.
With all that said, mortgage protection insurance is different from traditional life insurance in some key ways. First, the lender or mortgage company is almost always the beneficiary. This means any death benefit will bypass your loved ones and go directly to the mortgage lender in order to pay off the remaining mortgage.
What's more, since it's intended to pay off your mortgage balance, the death benefit will usually decrease after the first half-decade of coverage to keep pace with your remaining mortgage. This is much different from term and whole life insurance policies, where death benefits remain constant unless you alter the policy.
Finally, while term life insurance policies typically include fairly flexible term limits such as 5-, 10-year or custom intervals; mortgage protection insurance is almost always locked in at the exact length of time as your existing mortgage, whether it's 15 or 30 years. The term length of your policy may also be limited based on your age; for example, some providers will limit you to a 15-year term if you are older than 45.
Is it a Good Idea?
The real estate industry is filled with options and add-ons designed to protect a homeowner’s investment. While homeowners are content with basic coverage, others want added protection such as structural warranties, appliance service contracts and mortgage life insurance.
When deciding whether mortgage life insurance is right for you, it’s important to weigh the following advantage and disadvantages:
Convenience: The biggest advantage of mortgage life insurance is that it's relatively easy to acquire; there is often no medical exam required to purchase a policy.
Fall Back: Some people acquire mortgage life insurance because they can't qualify for an affordable life insurance policy. If you are denied term or whole life insurance due to a medical condition, mortgage life insurance could be an effective way to financially protect your family and home.
Supplemental: Mortgage life insurance can be used to help supplement a life insurance policy. For instance, if you die and your family is able to pay off an existing mortgage using a payout from your mortgage life policy; your family can then use the entire payout from your whole or term life insurance policy to pay other expenses.
Withering benefits: The most significant disadvantage of mortgage life insurance centers on declining payouts. Even though you pay the same premiums throughout the term of your policy; the payout will continue to decrease as you pay off your mortgage. In many instances, that premium will be much higher than what you would usually pay for a term life insurance policy.
Not comprehensive protection: Some experts argue that mortgage life insurance is more beneficial to banks than families, because the lender actually gets the money when a policyholder dies. Although the policy payout can eliminate financial stress associated with paying off a mortgage, your loved ones could still be left with unwieldy bills and other unmanageable debt.
Less flexibility: Mortgage life insurance benefits can only be used for one purpose: to pay off your existing mortgage. On the other hand, with a traditional insurance policy, your loved ones can use the final payout for the most important bills, whether it's loans, a new car, college tuition or mortgage payments.
Term life insurance coverage, in particular, can provide much more return on your investment compared to a mortgage life insurance policy, because you can choose a policy amount and length that matches the duration of specific debts, whether it spans 10, 20 or 30 years.
Making a Smart Choice
Who can benefit from mortgage life insurance? If you are a smoker, are obese, have diabetes, high blood pressure or any other health issue that might keep you from getting good rates on life insurance, mortgage life insurance may be your only option. With that said, it's generally better to avoid insurance designed to pay specific bills if at all possible.
The purpose of life insurance is to lessen the financial toll of your death on loved ones who depend on your ability to earn an income. Your family will benefit from having a term life insurance policy that gives them the flexibility to pay off the most important things, whether that's an existing mortgage or something else entirely.