Thinking About Buying Mortgage Life Insurance? You may Want to Think Again
Mortgage life insurance may sound appealing. But you should probably ignore it unless you have a sizable mortgage, or you're unable to afford or obtain traditional life insurance due to health issues.
Most people first become aware of mortgage life insurance when they go to purchase a house. Many lenders offer it to homebuyers as a sort of add-on to their mortgage.
The benefit of this form of life insurance: if you pass away while it's still in effect, the insurance company will pay your lender the remaining balance of your mortgage.
In other words, you make monthly payments so you and your loved ones can rest easy knowing your home loan will be paid off should something happen to you.
On the surface, such a product probably sounds appealing, especially when you consider that, for most people, a mortgage is the biggest debt they'll ever have. Dig a little deeper, though, and you'll find that the return on this particular investment isn't as impressive as it initially seems.
This Isn't Your Mother's Life Insurance
Before we get to why buying mortgage life insurance may not be the best investment you can make, though, let's look at a few interesting and even quirky details that are associated with it.
As mentioned earlier, this kind of insurance usually is offered by lenders when you apply to take out a mortgage on a house.
That's not the only way to obtain mortgage life insurance, of course, but it is the most direct. And there are some advantages that come along with purchasing it in that manner. One of them is that buying it through your mortgage lender is both easy and convenient, especially if it allows you to roll your premium into your mortgage payments. Another is that most mortgage lenders won't require you to take a medical exam before being approved for this kind of insurance.
The other way to obtain mortgage life insurance is to buy it through a third-party insurance company. But you have to jump through a few more hoops if you take this route. You're also likely to pay less than you would if you went with the product offered by your mortgage lender. So the added effort is likely to worth it for a lot of people.
The premiums associated with this option are "likely to be quite modest, depending of course on the age and health of the insured and the amount of initial insurance benefit," says Steven Weisbart, Ph.D., CLU, the Insurance Information Institute's senior vice president and chief economist.
That's in stark contrast to the premiums that usually are attached to the comparable plans a mortgage lender will offer you, which Weisbart describes as being "higher than separate general-purpose policies. But the market for life insurance is quite competitive. So the best advice is to shop around to get a good idea [as to] whether the mortgage-lender policy is higher than what you can get elsewhere. And, if so, higher by how much."
Regardless of which method you choose, it's important to keep in mind that mortgage insurance is completely optional. To put it another way: whether you buy it or not has no bearing on whether your mortgage application will be approved or turned down.
Another piece of information to keep in mind while considering mortgage life insurance is that, unlike other types of life insurance, no money will be paid to personal beneficiaries should something happen to you (assuming you're the policyholder). Instead, your mortgage lender will be the beneficiary of this kind of policy, with either monthly payments or a single, lump sum being sent directly to the company.
Finally, most mortgage life insurance policies cover a period of either 15 or 30 years. That said, you may not be able to take out a 30-year policy if you're over the age of 45 or 50.
Why You May Want to Avoid Mortgage Life Insurance
Based on all of the above, mortgage life insurance probably doesn't seem like the worst way to spend your money. And it's not, really—although it's also not likely to be the best way to spend your money.
First, consider this: unlike most other financial products you'll encounter as an adult, mortgage life insurance actually decreases in value over time, while the premium you pay every month remains the same. This is because the amount of coverage that's attached to this kind of insurance equals the current balance of your mortgage, so your coverage goes down as you pay off your loan.
That is in stark contrast to other life insurance products, like term life insurance, which maintain their value (or amount of coverage) throughout the period of the policy.
Term life insurance tends to be a more attractive option for a few other reasons, too. Unlike mortgage life insurance, for example, term life insurance allows your heirs or beneficiaries to decide for themselves how they'd like to spend the proceeds of your policy. Maybe they'd rather pay off their school or car loans, or their credit cards, than pay off the mortgage. Term life insurance allows them that freedom, while mortgage life insurance doesn't.
Weisbart, for one, is a fan of the options that term-life plans offer a policyholder's heirs. "I think most people would be better served by buying life insurance in amounts and in products that can be more flexibly used by survivors according to their needs following a death," he says, "which is often many years after buying the policy."
A mortgage is the sort of large debt "that could be a burden on survivors," adds Weisbart, who generally doesn't recommend buying life insurance tied to a particular use. "But there are some reasons it would be preferable to pay off other debts first. For example, because mortgage interest is tax deductible while other debt is not, and because other debt might carry a higher interest rate."
Also, in most cases, term or even whole life—sometimes called permanent or "cash value"—insurance can offer you and your loved ones more financial protection for less money. This is especially true if you're young, in good health, or both. The "no medical exams required" nature of mortgage life insurance usually results in its premiums being quite a bit more expensive than the ones associated with traditional life insurance.
One last strike against mortgage life insurance: you'll probably have to reapply for this type of insurance whenever you refinance your mortgage. That's not a huge deal in and of itself, but add to that the fact your new rate will be raised to reflect your current age and it's at least likely to be a bit of an annoyance.
When You May Want to Consider Mortgage Life Insurance
After reading through all of the above, mortgage life insurance probably seems far less appealing than other forms of life insurance.
There are some situations where you may want to consider purchasing it, though. A noteworthy example: you've been denied--or you're unable to afford--term or whole life insurance because you use tobacco products, or you're overweight, or you have other health issues or problems like diabetes or high blood pressure.
In such cases, mortgage life insurance might be a more attractive option—if not the only option—for you if your goal is to provide some assistance to your survivors should you pass away.
Be aware, though, that insurance providers generally aren't eager to deny people access to their products. In fact, Weisbart shares, "over 90 percent of applicants are accepted [meaning they get insurance]. Although a small percentage—five to 10 percent--are likely to have to pay higher premiums than 'standard' or 'preferred' classes due to a health or lifestyle condition. If people in these 'substandard' categories shop around, they might be able to determine whether a mortgage life policy is preferable."
In other words: if health reasons wouldn't hamper you in your search for life insurance, you and your loved ones probably would be better served by you investing in traditional policy instead of mortgage life insurance.
Mortgage Life Insurance Frequently Asked Questions
Q: Is there a difference between homeowners insurance and mortgage life insurance?
A: Yes, they're two completely different insurance products. Homeowners insurance protects the structure of your home as well as all of the possessions you place and store in and around it. It also covers many of your living expenses if you're forced out of a damaged or destroyed home and even provides liability protection. (For more on this kind of insurance, read our article, "Homeowners Insurance Basics.") Mortgage life insurance, on the other hand, pays off your mortgage should you pass away.
Q: If my parents have house insurance, would it cover the mortgage if they were to die?
A: No. Homeowners insurance offers people who buy it many protections (the main ones are detailed in the answer above), but it will not cover or pay off the policyholder's mortgage should he or she pass away. If that is your goal, you should consider buying mortgage life insurance or, better yet, term life insurance.
Q: Does life insurance and mortgage protection pay the bills after someone passes away?
A: This is a two-part question, so the answer is in two parts, too. Technically, traditional policies—whether we're talking about term life insurance or whole life insurance—would allow a person's beneficiaries to pay off various bills if something happened to their loved one (the policyholder). How many bills it would allow them to pay off, though, would depend on the size of the "death benefit" that's attached to that particular policy. (If you'd like to learn more about traditional life insurance, read "Life Insurance Basics.") Mortgage protection insurance, also known as mortgage life insurance, will not allow your beneficiaries to pay any bills, however, as its only purpose is to pay off a person's mortgage if they pass away.
Q: If I terminate my mortgage life insurance policy can I get any of my money back?
A: Unfortunately, the answer to this question is no. The only time this type of insurance pays out is if the policyholder passes away while their policy is still in effect. And even then it only pays out to the mortgage lender that has been designated as the policy's beneficiary. So, if at any time you decide to cancel the policy, you won't get back any of the money you paid into it.
Q: Can I cancel mortgage insurance?
A: If you're asking about mortgage life insurance, which is an optional form of insurance that pays off your mortgage if something happens to you, yes, you can cancel it at any time. You won't get back any of what you paid into it, though, so be aware of that before you call the company that sold the policy to you. If you're asking about private mortgage insurance (also known as PMI), on the other hand, you can't cancel it until your equity in your home has surpassed 20 percent.
Q: Can I use term life insurance instead of PMI?
A: PMI, which stands for private mortgage insurance, is a form of insurance that lenders require homebuyers to pay if their down payment is less than 20 percent. The only way to "get rid of it," so to speak, is to continue paying off your mortgage until your equity in your home has reached 20 percent. Neither term life insurance nor any other kind of insurance will keep you from having to pay PMI.
Q: How does one find out if there is mortgage life insurance on a house?
A: You could start by checking with the company that holds the mortgage on the home, as it's possible they also hold the mortgage life insurance policy on it. That said, it's also possible that company doesn't hold the mortgage life insurance policy on the home, as such policies aren't always attached to a home loan. If that doesn't work, try contacting any other insurance agents or companies the homeowner may have worked with in the past. Finally, look through the homeowner's bills or even check receipts, as this information may show up there, too.
Q: Can a senior citizen purchase credit life insurance on a mortgage?
A: When you say "credit life insurance on a mortgage," do you mean mortgage life insurance? If so, I'm sorry to say the answer is "it depends." Some insurance providers won't sell these policies to people over 50 or 60, although it's likely there are exceptions. So, contact a number of companies, explain your situation, and see if any of them sell mortgage life insurance policies to people your age. Don't forget, though, that there are other insurance products you can consider, too. Just remember that the older you are, the more you're going to have to pay for any of these policies.
If you're interested in finding out more about term life insurance, compare rates from top companies now to find an affordable plan that protects your home and family.
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