Often there is much uncertainty for individuals about what would happen to their house if they were to suddenly pass away. Mortgage life insurance helps to protect your family against mortgage debt and ensure that they can continue living a normal life while grieving a devastating loss.
What is a Mortgage Life Insurance?
Mortgage life insurance (or mortgage protection insurance) is a policy that is used to pay off your mortgage in the event that you die if your family cannot continue your mortgage payments. When purchasing a first home or a new home, most banks will offer mortgage insurance before they will approve the mortgage loan from the financial institution. Many people are therefore unaware that you can purchase mortgage insurance from a bank or from a private insurance company. You are allowed to refuse mortgage insurance provided by the bank when offered and will therefore fill out several waivers and forms to verify your decision to decline said insurance.
Is Mortgage Life Insurance Worth the Cost?
As with all types of insurance, there are always pros and cons to the different policies available. It is important to meet with an adviser and determine your personal situation when choosing the right policy for you.
Advantages of Mortgage Life Insurance
Ensuring the financial stability of your family and providing them with peace of mind is a main goal with mortgage life insurance. In the event of your unforeseen death, this policy will pay off your remaining mortgage to the bank in full. This also gives you peace of mind that your loan will be fully repaid and your family will not have to struggle to continue your mortgage payments during this hard time.
An additional benefit of mortgage life insurance is that there is minimal underwriting and typically universal coverage. Many financial institutions that provide basic mortgage insurance (not mortgage life insurance) practice post-claim underwriting. In the event that the insured dies and a claim is made, this is when the underwriting will be completed and determined whether or not the person was eligible for the insurance. At the inception of your mortgage life insurance policy you usually do not have to provide any medical information. This is a beneficiary life insurance policy for homeowners with serious pre-existing medical conditions that would eliminate them from normal life insurance policies.
Disadvantages of Mortgage Life Insurance
Mortgage life insurance premiums are typically at a fixed rate but the payout is fixed to your mortgage principle. Therefore as your mortgage decreases, the value of your policy decreases correspondingly. In other words, it is a deceasing benefit.
Another disadvantage is that because the benefit amount is used to repay your mortgage to the lender, your family will not receive an actual cash benefit from the policy. Therefore, some individual may see this to benefit the lender rather than the insured person since the mortgage lender is the beneficiary of the policy. This is how the mortgage is repaid in the event of your death. However, the benefit for your family is that they receive a house that is mortgage free and paid in full. They have now gained a family asset that can remain in the family or sold depending on your family’s wishes.
In a related matter, since mortgage life insurance names the lender as the beneficiary, the money is automatically given to the lender in order to pay off your mortgage. The policy benefit is not given to your family for other financial debts. So, although you have peace of mind that you are not leaving mortgage payments for your family members, there may be other debts that they need to pay off as well. Some debts may have a higher interest rate than your mortgage and therefore other insurance policies may be better suited for you so that these higher rate debts are paid off first before your mortgage.
At the beginning of your mortgage life insurance policy, the premiums paid will accurately reflect the coverage you are receiving for your home. However, the more you pay off your mortgage, you receive less coverage and therefore the fixed premiums you are paying will be inadequate for the amount of coverage. Be sure to get multiple quotes before purchasing your insurance policy.
Why People Decline Mortgage Life Insurance
As mentioned, individuals with mortgage life insurance pay the same premium amount each month for a decreasing coverage benefit. You also cannot choose where the policy payout goes as it is strictly dedicated to repay your mortgage to the lender. As a result, some individuals consider term life insurance policies because benefit settlement can be given to a beneficiary of your choice and can be used as needed. There can also be lower premium costs and larger payouts in the event of your death.
Why People Choose Mortgage Life Insurance
There are many reasons why people choose mortgage life insurance policies. Most often, policies do not require an initial medical examination or blood screen to insure an individual. Since you may not have to submit a medical history before coverage is issued, this grants individuals with severe pre-existing conditions insurance policies that may be refused for life insurance contracts. Mortgage life insurance can then help these persons purchase a home when they have trouble receiving term life insurance.
Should YOU buy mortgage life insurance?
Each personal situation is different and for this reason it is important to always conduct research on different mortgage insurance options available to you. Your decision to purchase mortgage life insurance will rest on many factors such as the loan amount you require and the value of the house. Further you will need to consider your family’s assets and your general health.
Be aware of the fine print and terms of each insurance policy and verify your full understanding of the policy being offered to you before your accept or decline it. Always buy enough insurance to cover all your financial obligations.