If you are the provider for your family, the last thing you want to do is leave your family in a financial bind after your unexpected passing. Most people purchase term life insurance to take care of settling up outstanding debts and providing an income stream for the surviving spouse. The policy should cover the unpaid mortgage on the home, too. In the event in does not, one could also consider purchasing a mortgage protection life insurance policy. A mortgage life insurance policy has similar features as a term insurance, but also has some significant differences. If you die owing a huge sum to a mortgage lender, the proceeds from the policy will pay off the note. But is a mortgage life insurance policy really worth it?
Pros and cons of mortgage term life.
On the plus side, you are paying (relatively) little for a lot of potential mortgage protection, which could be useful if your heirs are in no financial shape to make mortgage payments. On the negative side, term insurance is term insurance. If you live past the term of your mortgage term life policy, no benefit will be forthcoming for all those premiums.
You don’t find many fans of mortgage term life insurance in the mortgage industry. Their argument is that a regular life insurance policy might do the job just as well, and give your heirs more flexibility besides. Still, quite a few homeowners want mortgage term life insurance and appreciate its designated purpose.
Basic types of mortgage life insurance.
The cheapest type of mortgage term life is the level premium/level benefit policy. You can commonly purchase them with 20-, 25- or 30-year terms. As the name implies, the premiums are guaranteed to stay level for the entire policy term, and the benefit amount does not decline with time. As you see, they are structured to represent the length of the mortgage you may have as a 15 year mortgage or 30 year mortgage.
You can still find the original kind of mortgage term life policy, in which your premiums stay level but your coverage shrinks as your mortgage balance diminishes. While some banks and insurers still offer these “old school” policies, they are getting scarce.
What about return of premium life insurance?
Some homeowners decide to buy a return of premium term life policy instead of a mortgage term life policy. With an ROP term policy, the insurance company will give you all of your premiums back if you outlive the term (provided, of course, that you’ve kept your policy in force). Someone with 20 years left on a home loan could get a 20-year ROP term policy for an amount comparable to their mortgage balance and get all the money paid into the policy back without a tax consequence if they are alive two decades later. That money could be used for any need or objective.
How is mortgage life insurance different than private mortgage insurance?
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Well, PMI isn’t about protecting you at all – it’s about protecting the lender in case you default on your home loan. It diversifies that risk to a third party.
Should you consider mortgage life insurance?
You might be in a situation in which you really don’t want to risk burdening your heirs with an existing mortgage – especially if they are trying to pay off one themselves. Or, maybe you want a more flexible insurance option that could be used to pay off a mortgage or meet other needs. Talk to your financial or insurance advisor today to explore this a little further.
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