So you’ve ended your mortgage. congratulations! You are now the homeowner. This is one of the biggest investments of your life. It’s also the most important step in your life because of the time and money you put into it. So you want to make sure your dependents are covered in case you die before you pay off your mortgage. One option you have is mortgage life insurance. But do you need this product? Read on to learn more about mortgage life insurance and why it can be an unnecessary expense.
So you’ve ended your mortgage. congratulations! You are now the homeowner. This is one of the biggest investments of your life. It’s also the most important step in your life because of the time and money you put into it. So you want to make sure your dependents are covered in case you die before you pay off your mortgage. One option you have is mortgage life insurance. But do you need this product? Read on to learn more about mortgage life insurance and why it can be an unnecessary expense.
key takeaways
- Mortgage life insurance is provided by the Bank** as a life insurance affiliated lender, who obtains information about your mortgage from public records.
- Companies solicit business by telling those who owe their mortgages that their loved ones would face financial hardship without these policies.
- These products are characterized by high premiums and a lack of transparency.
- They may appeal to borrowers with poor health or poor medical histories.
What is mortgage life insurance?
Mortgage life insurance is a special type of insurance policy offered by banks that are affiliated lenders and independent insurers. But this is not like other life insurance. Instead of paying a death benefit to the beneficiary after your death like traditional life insurance, mortgage life insurance only pays the mortgage after the borrower dies, as long as the loan remains in existence. This is a great benefit to your heirs if you die, leaving a balance on your mortgage. But without collateral, there is no return.
One thing to keep in mind: Don’t confuse mortgage life insurance with mortgage insurance. The latter is private insurance that must be a condition of some traditional mortgages. While mortgage life insurance protects your borrowers and their heirs, mortgage insurance protects lenders if the mortgagor fails to meet their financial obligations. Premiums are either paid separately or included in the borrower’s monthly regular mortgage payment.
Mortgage life insurance is not mortgage insurance The latter protects the lender in case the borrower defaults on their mortgage loan for any reason.
Once you’ve closed your loan, keep an eye out for regular emails and phone calls trying to sell you a mortgage life insurance policy. These solicitations are often disguised as official demands from the mortgage lender. Documents often start with shocking titles like:
- important hint! Please fill out and return!
- Final notice! Mortgage Protection Card!
- Admission Notice! Unsecured Housing Guarantee!
These statements are often followed by scary, strategic statements like, “If you die tomorrow, will your family be able to keep paying the mortgage and maintain their quality of life?”
Types of Mortgage Life Insurance
Mortgage life insurance policies, also known as mortgage protection life insurance or mortgage protection insurance policies, come in two basic forms. The first is a diminishing payment policy, in which the size of the policy decreases proportionally as mortgages are reduced. So, the closer you get to zero, the lower your spending will be. Another type of mortgage life insurance is called term insurance. With such a policy, spending will not decrease.
Mortgage Life Insurance Benefits
Mortgage life insurance may benefit those who are ineligible for term life insurance due to ill health, as such policies are often not covered. But as with other policies, candidates should seek quotes from several companies and check each company’s financial strength rating with AM Best, an alphabetical insurance company.
Those who want to avoid a drop in their payout policy should opt for a policy with no medical check-up period, with the same level of premium and death benefit. Although these policies cost more than term policies and may have lower coverage, at least they’ll pay the same premiums whether you die 10 or 25 years into your mortgage.
Another possibility is to get a policy that offers earlier coverage at a cheaper price in terms of your mortgage. Once you’ve paid off your principal, consider switching to a guaranteed policy.
Some policies may refund your premium if you never file a claim after paying off your mortgage. However, as inflation erodes the value of your premiums, you will likely be refunded much less of your premiums. Plus, if you buy cheaper term life insurance, you’re likely to waste the opportunity to invest the money you could have saved.
The truth about mortgage life insurance
A mortgage-backed life insurance policy is often unwise. First, there is no flexibility. Unlike term life insurance, where the beneficiary can use the coverage as they see fit, most insurers pay the lender directly, so your beneficiary never sees any money.
Second, expect to pay high premiums. If you are a healthy person who has never smoked, these plans are usually more expensive than regular life insurance. Traditional life insurance may be a better option.
There’s a good chance you won’t find much transparency. Unlike other types of insurance, it can be difficult to get a quote for mortgage life insurance online, which is a major problem as prices can vary widely.
Finally, expect your premiums to fluctuate. Unlike a term policy, which charges a fixed premium for 30 years and the price does not rise unexpectedly, a mortgage life policy may only have a fixed premium for the first 5 years and may spike at any time thereafter.
Do you need mortgage protection life insurance?
Reduced spending
Some companies offer policies that charge a fixed premium for the life of the policy. But in many cases, spending on these policies may decrease over time as potential spending decreases. This type of mortgage life insurance, sometimes called reduced term insurance, is designed to pay off your mortgage balance while your beneficiary pays a portion of your mortgage principal each month. As a result, the policy’s potential payout shrinks with each mortgage payment.
On the other hand, some newer products have a feature called “Death Benefit” where the payout doesn’t drop. For example, if you’re taking out a $100,000 mortgage, your beneficiary (not the lender) will receive the full $100,000 even if the mortgage debt drops to $65,000. Some policies allow you to convert your mortgage insurance to life insurance if you pay off your mortgage during the life of the policy.
Age limit
Like other types of life insurance, mortgage life insurance may not be available after a certain age. Some insurers offer 30 years of mortgage life insurance for applicants aged 45 or under, and only 15 years for applicants aged 60 or under.
Bottom line
Mortgage life insurance providers tout the importance of adding their products to existing life insurance coverage by convincing you that payouts will be eaten up by mortgage payments, leaving your loved ones in financial distress. But a better remedy is to buy more life insurance.
Those worried about leaving an expensive mortgage with a loved one should consider term life insurance, a typically superior solution to mortgage protection life insurance. New York Life, one of the best life insurance companies, offers flexible term life insurance policies.
