Last Updated on: 04/20/2018
So you’re a proud homeowner and you’ve made the decision to protect your nest by buying mortgage life insurance.
Let’s take a look at mortgage life insurance vs. term life insurance along with the cost, benefits, and exclusions associated with each, and help determine which one is the better deal for you, the consumer.
Quick Article Guide:
1. Which is Right for Me? Mortgage Insurance or Term?
2. Important Considerations Comparing Term Life vs. Mortgage Life Insurance
3. Who Should be Your Life Insurance Beneficiary – Your Lender or Your Family?
4. Declining Death Benefit Should Equal Lower Premiums, right?
5. What If I Pay Off My Home Early Or Move?
6. How Does Bundling Factor Into Mortgage Life Insurance?
Life insurance for a specific purpose (i.e. to cover a mortgage) is comparatively easy to figure out.
If you have a 30-year mortgage and owe $200,000…voila, you know your amount (policy “face value”) of coverage you need and length of time (“term” in life insurance jargon).
You should quickly focus on comparing the cost/benefits of term life insurance vs. mortgage life insurance offered by your lender. Eliminate whole life, universal life and other forms of permanent life insurance from your shopping list – they aren’t suited for this purpose and are very expensive. It’s much better to pay down your mortgage faster and eliminate the life insurance expense.
Now that you’ve narrowed things down to a term insurance policy vs. mortgage life insurance, what are the most important considerations?
#1: How is Your Overall Health?
Mortgage life insurance is generally the quickest and easiest to qualify for. You commonly don’t need a physical, which is huge if you’re in poor health, refuse to see a doctor, have ongoing substance abuse issues or other major underwriting concerns making you a poor risk.
So shouldn’t mortgage insurance then be a no-brainer? Not always…
If you’re in fair or good health, “no exam” mortgage insurance is relatively expensive. The cost of term life insurance, which requires a no-cost in-home health screening exam, could be half the cost of mortgage life insurance. An experienced life insurance agent with access to multiple life insurance companies (carriers) will provide estimates and comparisons, as each insurer has its unique underwriting guidelines and corresponding policy costs. We specialize in finding affordable insurance for individuals who are consider to be a “high-risk” for life insurance.
#2: Exclusions with Mortgage Life Insurance
You want to make sure you’re comfortable with the limitations/ restrictions (known as “exclusions”) you’d have with mortgage life insurance, otherwise you may be living with a false sense of security.
Because it’s a simplified issue policy, and not fully medically underwritten, there will be reasons why the policy wouldn’t pay. If you’re diabetic, for instance, you probably don’t want a policy that wouldn’t pay out if you died of something related to that affliction. Many age life insurance policies ONLY COVER DEATH DUE TO ACCIDENTS. Again, check with your agent and/or the insurer.
If you’ve jumped through the hoops to qualify for term life insurance, it’s the best coverage you can get. As long as you’re paying premiums, the only reasons the policy wouldn’t pay with your demise if you lied on the application and died in the first two years. There’s also no waiting period – you’re fully covered from the time you make your first payment.
With mortgage life insurance, your lender is your beneficiary – they are protecting their loss by you not fulfilling your financial obligation. Being free and clear of the mortgage provides help and peace of mind, but may not be ideal.
This may be OK if all you need is the roof over your family’s collective heads. For most of us, there are other bills our families could struggle with. It may be better for them to receive a tax-free lump sum, allowing them to make future mortgage payments. This also allows them to have a cushion for other financial obligations that may arise, while getting over the loss of you.
With mortgage life insurance, your cost remains the same year to year though your outstanding mortgage is declining over time.
This should cost me less, right? Maybe, but typically the answer is NO. Mortgage life insurance is usually twice as expensive as term life insurance, especially if you are in fair or better health.
They’re glad to charge you a level amount and reduce their “exposure” overtime. Again, if you’re willing and able to do a free in-home term insurance exam, you’ll get more comprehensive coverage at a lower cost. And though your mortgage reduces over time, property taxes, utility cost, and other expenses continue. $2,500 in property taxes doesn’t sound like too much of a burden, but that $50,000 could be used to buy a couple cars your family over the next 20 years!
An extra $50,000 in term insurance may only be the cost of a weekly latte. You may even find that adding a little more term life coverage may even cost you LESS! Many companies, for example, charge less for a $250,000 term policy than a $200,000 policy. In insurance jargon, it’s called “banding”. The cost of insurance decreases at certain commonly purchased amounts. Check with your agent, they should be willing to share their insider’s knowledge.
Unfortunately, Most of us won’t die quietly in our sleep. Let’s say you have a nasty illness and leave a $40k hospital bill behind, and another $10k bill for burial and other final expenses. That extra $50,000 left behind will be needed.
Mortgage life insurance will end when you sell or pay off your home. With term insurance, you’re not obligated to keep it any longer than you need it. The cancellation process is simple. Just like your home or auto insurance, you can call your agent and he’ll provide the paperwork to do so, or you can simply stop paying your premiums. If your payments “lapse” by more than 30 days, your policy will typically cancel automatically. Of course, if you set up an “autopay” through your bank you’ll need to be more proactive.
Most life insurance companies pay a prorated refund. For example, if you pay quarterly, and cancel one month in, you may be due 2 months premiums.
Bundling is another issue. If bundled into your mortgage, you can’t cancel mortgage life insurance later if you don’t need it. Why would this be an issue? Well, let’s say it’s just you and your younger wife, and your intention is to have the insurance there to keep a roof over her head; in other words, you have no other heirs. In the unfortunate event she precedes you in death or runs off with the gardener, you may want to stay in your home, but you will no longer want or need the life insurance. If you’re like me, you probably wouldn’t want to be paying for something you don’t need.
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