There are a lot of different types of insurance out there so it can be hard to decide which ones are the best fit for your current situation in life. If you are a homeowner and have a mortgage, then you might be wondering if you should buy mortgage life insurance. The first step to answering this question is understanding how mortgage life insurance works. Once you understand how it works it is easier to compare mortgage life insurance to other insurance options and pick the best fit for your specific situation.
How Does Mortgage Insurance Work?
The first question most people have is how does mortgage insurance work. Simply put, mortgage insurance works exactly as the name implies. It is there to repay your mortgage in the event you pass away or become unable to work. Mortgage insurance is sometimes referred to as mortgage protection insurance. As with all types of insurance the decision comes down to whether mortgage insurance is the best solution, at the best cost, for your specific situation.
Is Mortgage Life Insurance and Private Mortgage Insurance the Same Thing?
With all of the different names for different types of insurance policy options it is easy to get confused. A common question is whether mortgage life insurance is the same thing as private mortgage insurance (often referred to as PMI).
Mortgage life insurance is designed to protect your home in the event of death or disability. Private mortgage insurance is designed to protect your lender in the event you cannot pay off your mortgage, regardless of the reason.
Mortgage Life Insurance Vs. Private Mortgage Insurance
The easiest way to highlight the difference between mortgage life insurance and private mortgage insurance is by looking at who the policy is designed to protect and what happens if the insurance is activated.
Who Does It Protect?
Mortgage life insurance is designed to protect homeowners. It is meant to repay your mortgage in full while still allowing you to remain the owner of your home. On the other hand, private mortgage insurance is designed to protect your lender. Therefore it is often required if your down payment amount is less than 20%.
What Happens if the Insurance Is Activated?
If your mortgage life insurance is activated, it means you have passed away or have become disabled and can no longer make mortgage payments. Once activated your mortgage life insurance will send a payment directly to your lender for the full amount remaining on your mortgage. This allows you or your family to retain ownership of the home. Private mortgage insurance provides none of these benefits. Instead of protecting you and allowing you or your family to retain ownership of your home, private mortgage insurance covers the difference between the price your lender receives from selling your home, after it is foreclosed on, and the remaining balance on your original mortgage.
Mortgage Life Insurance Vs. Term Life Insurance
Mortgage life insurance is notably different from term life insurance in several ways. The most obvious way is mortgage life insurance only covers the remaining balance on your mortgage whereas term life insurance is a lump sum payment to your family. The lump-sum payment allows your family to decide how to use the money. They could decide to use it to pay off your mortgage but they could also decide to use it for other expenses.
Aside from the function of the insurance, another key difference between mortgage life insurance and term life insurance is term life insurance is often less expensive and it allows you to decide how much the policy is worth. Mortgage life insurance will only be worth the remaining balance of your mortgage. Term life insurance will be worth whatever lump sum amount you set when selecting the policy.
Is Mortgage Life Insurance Your Best Option?
The big question most people have is if they should buy mortgage life insurance. Unfortunately, there is not an easy answer to this question because it is entirely reliant on your situation and what you want. For example, most people will not get mortgage life insurance on a rental property because it is not part of their personal estate. The only way to decide whether you should buy mortgage life insurance is by carefully examining the benefits and potential drawbacks and compare it to other options, such as term life insurance.
Benefits of Mortgage Life Insurance
Peace of Mind
The first benefit of mortgage life insurance is peace of mind. If you want to pass your home on to your children or grandchildren mortgage life insurance insurers that the mortgage is paid off and the property will be passed on to your heirs.
Another benefit of mortgage life insurance is it requires very little underwriting compared to other types of insurance. For example, you likely will not be required to go through any medical exams or blood work to determine whether or not you qualify for the policy. This is particularly beneficial for people who have major health concerns and may be excluded from other types of traditional life insurance policies.
May Include Disability Benefits
The final benefit of mortgage life insurance is many policies also cover your mortgage payment if you become permanently disabled. This is important to consider because most life insurance policies only become activated upon death. If you become disabled term life insurance will not pay out any benefits and you could be at risk of losing your home.
Potential Drawbacks of Mortgage Life Insurance
The most obvious potential drawback of mortgage life insurance is the value of the policy decreases over time because it mirrors the remaining mortgage balance. This is notably different than traditional life insurance policies because they guarantee a specific, fixed payout. For some people, mortgage life insurance may be a good idea initially, but over time become less financially beneficial.
Your Family Does Not Receive the Money
The second potential drawback is your family will not receive any money from your mortgage life insurance policy. This type of policy is typically drawn up so that your lender will receive any proceeds upon your death. On one hand, this makes sense because your mortgage life insurance is designed to pay off your mortgage so it should go to your lender. On the other hand, if this is your only type of life insurance then your family will receive nothing upon your death to cover other types of expenses.
The final potential drawback of mortgage life insurance is it typically is more expensive than term life insurance. This goes back to the lack of underwriting which may be a benefit to some. Unfortunately, because there is less underwriting, the premiums are generally higher. This is a situation where if you know that you can get through the underwriting process a different type of insurance, such as term insurance, might be a better decision.
Other Types of Insurance to Pay Off Your Mortgage
Term life insurance is considered to be the best alternative to mortgage life insurance by many financial planners because you can name your coverage amount. For example, if you have a $200,000 mortgage, you could get a term life insurance policy for $200,000. This allows your family to decide whether paying off your mortgage is the best decision for them. While most people hope their heirs will want to keep their home this isn’t always the case. By choosing term life insurance over mortgage life insurance, you give your family more flexibility. Additionally, term life insurance will almost always have lower monthly premiums than mortgage life insurance.
While there are benefits to choosing term life insurance over mortgage life insurance there are also some key drawbacks to consider. The most important drawback is whether or not you have a satisfactory health history which will allow you to get term life insurance. If you are medically uninsurable for term life insurance there is still a good chance you would qualify for mortgage life insurance because the underwriting process is less strict.
Mortgage Disability Insurance
Mortgage disability insurance will pay off your mortgage if you become disabled and can’t work. This is a good solution for people who already have enough traditional life insurance to cover the remaining balance on their mortgage. Mortgage disability insurance is typically less expensive than mortgage life insurance because it covers a single type of situation whereas mortgage life insurance often covers both death and disability. As a result, mortgage disability insurance has lower premiums but also is less likely to be used. In most cases, mortgage disability insurance is best suited for individuals who are younger and are concerned about paying their mortgage if they become disabled and do not have adequate long-term disability insurance.
Should You Buy Mortgage Life Insurance?
Deciding if you should buy mortgage life insurance requires you to take numerous factors into consideration. For example, if you do not qualify for term life insurance then the odds of mortgage life insurance being beneficial significantly increases. On the other hand, if you do qualify for term life insurance and do not want to pay higher monthly premiums than mortgage life insurance may not be the best solution. Regardless of the specific type of insurance you choose it is essential to select enough coverage to cover your mortgage and potentially additional expenses upon death and disability.