If you just purchased a new home, you've probably been offered some type of mortgage life insurance protection insurance from your lender.
What is mortgage life insurance?Mortgage life insurance (or mortgage protection insurance), is meant to repay your mortgage if you were to die, or depending on the carrier, become disabled and can no longer make your payments. This type of life insurance benefits you as a homeowner by paying off your home mortgage in full. It's typically offered when you fill out your loan papers and sign for your mortgage, and purchasing it is optional.
Benefits of mortgage life insurance
There are two main benefits to mortgage life insurance:
- A free and clear mortgage. In the event of your death, mortgage life insurance is designed to pay the balance of your home loan to the bank.
- Minimal underwriting. Typically, mortgage life insurance requires very little underwriting. This means that there is often no medical exam or blood work required in order to qualify for a policy. This can be a desirable feature if you have major health concerns that may have excluded you from obtaining a traditional life insurance policy in the past.
The disadvantages of mortgage life insurance
There are three primary disadvantages of mortgage life insurance:
- The payout isn't fixed. Mortgage life insurance is typically referred to as a decreasing term life policy. As you repay your mortgage, the value of the policy also decreases. Unlike a regular life insurance policy, mortgage insurance can't provide you with a fixed payout. So while you may start off with a $200,000 policy that benefit declines as your mortgage is gradually paid down.
- The policy payout goes directly to the bank. With this type of policy, it's the lender who is the policy's beneficiary - not your family. So when you die, the payout goes directly to the lender to repay the mortgage. Yes, your family benefits from having a mortgage-free home, but it won't leave them with any cash for other outstanding debts and immediate living expenses - unlike a traditional life insurance policy.
- Premiums can be pricy compared to the coverage. In the beginning, the premiums you pay for mortgage life insurance may seem reasonable and in line with the coverage amount. However, as time goes by, you'll actually be paying for less coverage (due to the policy being a decreasing term plan).
While you may like the idea of having mortgage protection, you may prefer having a more traditional life insurance policy. If so, you might consider traditional term life or first-to-die life insurance.
Often used for mortgage protection, these types of life insurance policies can ensure that your surviving spouse has the funds to pay off the mortgage, as well as any other expenses he or she may have.