What is mortgage life insurance?
Don’t confuse mortgage life insurance with private mortgage insurance, a common error. PMI protects your lender (not your family) if you default. It’s usually required if you put down less than 20% of the purchase price. On the other hand:
- Mortgage life insurance is a voluntary form of term life insurance that pays off your mortgage loan if you die.
- The coverage in mortgage life insurance expires when the mortgage is paid in full, explains Mary Ann Cook, senior director of knowledge resources at the Insurance Institute of America, an industry education association in Malvern, Pa.
- Premiums, which remain the same for the life of the policy, vary based on such factors as your age, health, and the mortgage amount. Jamaal M. Oldham, an agent with Farmers Insurance in Nashville, says in his region, a healthy 27-year-old man with a $250,000 mortgage pays $66.38 annually for mortgage life insurance; a 45-year-old-man, however, pays $244.92 annually.
Policies in your region may be priced differently, and as with any life insurance policy, premiums vary with health history. Major carriers, such as State Farm, issue mortgage life insurance policies, so it pays to shop around.
You can also sign up through your mortgage company. The quickest way: Just fill out a form.
The benefits of mortgage life insurance
- Protects a two-income family. If you and your spouse both need to work to pay off your mortgage, a mortgage life insurance policy takes care of your mortgage in case one of you dies, no problem.
- It’s a lifeline if you’re difficult to insure for health reasons. Underwriting for mortgage life insurance isn’t as stringent as standard life insurance because it’s based more on the volume of polices than the individuals insured. You probably won’t have to face a medical exam for a mortgage life insurance policy.
The drawbacks of mortgage life insurance
- It’s pointless for some. “Let’s say I’m single and have no heirs,” says Paul Essner, a partner at The Signature Group of Companies, an insurance and financial services firm in Garden City, N.Y. “If something happened to me, frankly who cares if the bank gets its money?”
- It’s duplicative for many. If you already have adequate savings and insurance, it might not make sense to get mortgage life insurance.
- It becomes worth less every month. Although premiums don’t change, coverage does, as each month your mortgage—and thus any possible payoff—is reduced. So if you have a $100,000 policy to cover a $100,000 mortgage, when you’ve paid $20,000 in principal, your family would only get $80,000 if you died, for the same premiums.
- You lose control of how the money is spent. The payoff on a mortgage life insurance policy goes straight to your bank to payoff the loan. Your heirs have no choice on this—and this might work to their disadvantage. John Rushe, owner of Werle & Rushe Agency in Erie, Pa., notes that if your loan is at 4.5% when rates are 8.5%, paying off the whole mortgage may not be a priority. Your family may be better off investing it for college tuition, for example.
- Change houses—lose the policy. Say you buy a mortgage life insurance policy today and 15 years from now you sell your house and buy another one—or just refinance. If you have a conventional life policy, no problem. But a mortgage life insurance policy is tied to your mortgage; you have to cancel it and buy a new one. Only now, you’re 15 years older and your rates probably have gone up dramatically.
Fortunately, mortgage life insurance isn’t the only way to keep a roof over your family’s head:
- Standard term life insurance. It’s economical and renewable and you’re protecting your family no matter where you move.
- Return of premium life insurance. Standard term life with a twist: Although a little more expensive, if you live beyond your term—usually 30 years—the company refunds all your premiums.
If it helps you sleep at night knowing your mortgage is covered in the event of your death, go for it. But overall, says Essner, buying a mortgage life insurance policy is like having the flu but treating only one symptom.
If you can get standard term insurance, it’s probably a better bet.