Do You Need Mortgage Life Insurance?

There are 3 kinds of insurance that's tied to mortgages. The one that many are familiar with is private or personal mortgage insurance, that lets you buy a home in the US even if you don't have a big enough downpayment to qualify for a "conventional" mortgage (which normally requires about 25% down). However, there is also mortgage life insurance that might be offered by your lender, that will pay off your mortgage if you die. It's this kind of insurance that I think is a complete rip-off.

Why? Well, let's start with the facts of mortgage life insurance. First of all, you are likely to get a pitch for it, just as you are signing off on your mortgage. There will likely be an "ominous" tone to the discussion, and pressure to "prove" that you have enough life insurance to cover your mortgage in the case that anything happens. You're also likely to be asked to sign something indicating that you have refused life insurance on your mortgage (a subtle but definite pressure tactic) and also that the person sitting across from you did offer it to you.

Please ignore all these efforts. In the vast majority of cases, life insurance offered by your lender on your mortgage is a bad deal.

In fact, the rates you pay for lender-provided life insurance can be as much as four times what you would pay for a comparable term life insurance policy. No kidding!  This is a real case of buyer beware. Also, you will pay a set premium, based on the opening balance of your mortgage, for the full term of the mortgage. So, you'll keep paying the same amount of money, but the amount of "benefit" to you is actually declining! Remember: this insurance does not pay out a set amount. It will simply pay off your mortgage, so if you are doing the right thing and paying your mortgage off quickly, your insurance becomes more and more expensive as you have less and less mortgage to pay off.

Finally, this insurance is not portable. In other words, if you move lenders, you will go through the process of qualifying for mortgage insurance all over again. However, you will likely pay more for it, because you are now older and a "higher risk". A portable life insurance policy (that doesn't depend on your lender) will completely avoid this kind of increase for the full term of the insurance policy.

What is your option? Your best option is to be fully insured through a separate term life insurance policy. This policy should cover all your debts, and not just your mortgage, in the case of your death. To do that, you have to make sure that the amount of insurance that you carry is sufficient to cover those debts, with a bit extra for such things as funeral costs and replacement of your salary for the first couple of years. This should leave your family in much better shape than a simple mortgage life insurance. It should also cost you less.

Just make sure that you really get the term life insurance. A family that has lost a breadwinner, and is left with a substantial mortgage, can face financial ruin.  

Have I got you thinking? Good. If you need to do a bit of research on the right term life insurance, check out a few of this site's sponsors.

Michael Chantrel 

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