3 Reasons Life Insurance for Mortgage is a bad idea
There is one financial product that many people purchase without even remembering they said ‘yes’. It is offered at a stressful and emotional time for an individual or couple who are about to make the biggest purchase of their life. The price seems paltry compared to the mortgage payment they’ve just agreed to, and the answer to the question posed seems like a no-brainer.
The question typically posed is this: “If you were to pass away, would you want to have your mortgage automatically paid off?”
While the majority would have to agree (to minimize financial loss at such a time of emotional loss), few think through what is really being offered – especially when the premium seems so low (often $30-$40 bi-weekly). What most don’t know is that the same coverage via a life insurance policy can come at less than half the cost and provide far more flexibility.
Mortgage Insurance is in fact life insurance. It is unique in many ways though that make it a poor choice for those wanting to ensure their mortgage is paid off at the untimely death of one of the owners.
Mortgage life insurance is sometimes called ‘croak and choke insurance.’
The idea here is that you buy a policy naming your mortgage lender as beneficiary in the event of your death, so that your mortgage can be paid off.
Worse yet, premiums during the life of your loan tend to be roughly 10 times the free market rates for insurance.
So here it is:
The 3 Reasons Life Insurance for Mortgage is a bad idea:
- Its Value Declines with Time
Unlike life insurance policies, the value of a mortgage life insurance policy declines over time. You still pay the same monthly amount, however, since you are paying down your mortgage balance each month, the value you or a loved one would receive from the policyholder’s death would only be the remaining balance of the mortgage. As time goes on and the remaining balance declines, the benefit in the event of death would also decline.
- It Can Only be Used on a Mortgage
Mortgage life insurance has a singular purpose: to pay for your mortgage if the policyholder dies. For that reason, it is not as flexible as term life insurance, which pays your benefactor so that they may do whatever makes the most sense financially at that time.
It won’t always make the most sense to use an insurance windfall to pay off a mortgage. For example, if a benefactor has credit card debt they are paying 15% on while their home mortgage interest rate is only 3%, it would make the most sense to pay off the highest interest debt first while continuing to make mortgage payments.
- It is Usually More Expensive than Term Life Insurance
Unless you have a pre-existing medical condition, term life insurance in your twenties and thirties (when most folks venture into home ownership) is extremely cheap. It is possible to get $250,000 in coverage for $10-15 per month.
Mortgage life insurance tends to be more expensive – around $70-$100 for the same amount of coverage. Plus, it declines with time!
Why you should buy Life Insurance instead of Mortgage Life Insurance
Mortgage Insurance is in fact life insurance.
It is unique in many ways though that make it a poor choice for those wanting to ensure their mortgage is paid off at the untimely death of one of the owners.
Life Insurance and Mortgage Life Insurance Comparison
Let’s compare these two products so the next time you’re facing this decision you’ll be better prepared.
The beneficiary of life insurance is whoever you choose – your estate, your surviving spouse, a friend, a charity, your parents or your children.
The face value is received without tax, and can be used for any purpose: to care for loved ones, pay bills, leave an inheritance, look after capital gains owing or pay off the mortgage.
The beneficiary of mortgage insurance is the bank where the mortgage is held, so your loved ones never get access to the proceeds – the bank receives it.
So, yes the mortgage is paid off, but it might leave survivors with a paid-off house and no financial assets to pay the bills.
The face amount of life insurance is the amount your beneficiaries receive – whether it is $100,000, $500,000 or $1 million and premiums are based on this amount, your age and health.
With mortgage insurance the face amount of insurance is the mortgage amount owing, which means you’re paying the same premium for years on a declining face amount.
And if you accelerate mortgage payments, your mortgage insurance premiums are buying even less face value.
Mortgage Life Insurance is more expensive than Term Life Insurance
What makes mortgage insurance even more expensive is that it is typically offered without a physical or blood work.
If you are healthy, then you should want to get a physical to make sure you are paying the lowest possible premium.
Mortgage insurance premiums are high, partly because rates are based on the ‘average health’ of the age group being insured.
Mortgage insurance payouts are another problem.
As is the case with all insurance payouts, insurers will review the details of each individual claim.
In the case of mortgage insurance, if the insured had a ‘pre-existing health condition’ that was either not disclosed at the time of application, or just existed at the time of application, the claim may not be honoured.
And that is bad news for the surviving family. Premiums over the insurable period were dollars thrown away, and the mortgage is still owed.
Portability is yet another problem with mortgage insurance.
If you decide to move your mortgage from one lender to another, the mortgage insurance is automatically cancelled – it doesn’t move with you.
With life insurance, there are no such stipulations – once you are accepted, as long as premiums are paid, you are covered.
If you want to cancel one insurance coverage (say, your current mortgage insurance) and replace it with another insurance policy (say, basic term life insurance), DO NOT cancel the first until the second is in place. There is nothing worse than being uninsured for a period, or worse finding out that you are uninsurable after cancelling a policy that may have covered you.
Don’t confuse Mortgage Life with Private Mortgage Insurance
If you’ve purchased a home with less than 20 percent down, your lender probably required you to purchase Private Mortgage Insurance (PMI.)
While mortgage life insurance will pay off your loan when you die, PMI only covers a portion of your loan if you default. PMI is designed to reduce the risk faced by lenders, when homebuyers have less than 20 percent for a down payment.
Unfortunately, some people continue to confuse Private Mortgage Insurance with Mortgage Life Insurance.
Private Mortgage Insurance puts people in homes; mortgage life insurance takes them out. It pays all or a portion of your mortgage balance in the event of your death.
And while PMI might make it easier for you to get a loan, you need mortgage life or another form of life insurance to guarantee your loan is paid off should you die prematurely.
Do You Need Life Insurance if You Have a Mortgage?
Your loved ones don’t inherit your mortgage debt when you die. But if someone else applied with you on the loan or you want your dependents to stay in the home after you die, having life insurance coverage is a good idea.
Be careful about the type of policy you choose, though. Do your research to get the most bang for your buck.
3 Reasons You Need Life Insurance if You Have a Mortgage (Life Insurance for Mortgage Protection)
Life insurance is meant to benefit your loved ones, so it’s important to consider their needs when determining whether you need coverage.
1. You want your dependents to remain in the home
Losing a loved one is a devastating experience on its own. If your dependents also have to move out because they can’t afford mortgage payments, it can feel like adding insult to injury.
Getting the right coverage won’t bring you back, but it can help alleviate some of your loved ones’ suffering.
2. Your dependents may not be able to afford the payments
If your partner is a stay-at-home parent or you were the main breadwinner in the family, they may not have sufficient income to continue making mortgage payments.
So, having coverage to pay down the debt can make it easier for your loved ones to get by financially knowing they don’t have to worry about a big monthly debt payment.
3. You may want to provide more financial security
Even if your dependents can manage to continue making payments on the house, having enough coverage to pay off the debt could eliminate a major expense for them. As a result, they could use that cash to make better progress toward their financial goals.
Buy Term Life Insurance instead of Mortgage Life Insurance
If you are interested in protecting your family from mortgage that when you die, it may make more sense to get term life insurance instead, but since all situations are unique you should learn more about mortgage insurance vs term life insurance.
Term life insurance is often a better deal when you consider how much you are paying premiums compared to the benefit that you will receive.
For the same amount that you’re paying for a mortgage life insurance policy, you could probably get a term life insurance policy that will pay off your mortgage, and leave some money to your heirs.
If you are healthy enough to qualify for a term life insurance policy, it makes sense to get one. For instance, you could get a 30-year term policy that will cover your life for the entire term of your mortgage.
This way, your family is protected from the debt.
Best Term Life Insurance Online Quotes
If you are interested in finding out exactly how much term life insurance will cost for you, get a free term life insurance quote HERE!.
Mintco Financial’s team of licensed life insurance representatives can help walk you through the process step by step and help you determine the type of coverage you need and how much.