So you took the plunge and bought a house, with a mortgage to match. You may be wondering if you need life insurance to cover the mortgage in case something happens to you before it’s paid off. Without life insurance, your estate will be liable for any outstanding home debt you leave behind. Unless your spouse is loaded, your family would face a sizable financial burden. One way of preventing that outcome is with dedicated Mortgage protection life insurance. Here’s how it works.
Find out now: How much life insurance do I need?
What Is Mortgage Protection Life Insurance?
Mortgage life insurance plans give a tax-free payout that will cover the balance on your home mortgage. Depending on the policy, the payout may occur in the event of your death, or in the event that you lose your job or become disabled. In some cases, the payout goes to your family, while in others the insurance company pays your mortgage lender directly.
Mortgage protection life insurance is different from Private Mortgage Insurance (PMI), and from the mortgage insurance FHA loans require. That’s because the lender doesn’t require mortgage protection life insurance. Instead, it’s an optional measure some people take to protect their family’s biggest asset, their home.
When Mortgage Life Insurance Makes Sense
There are certain people for whom mortgage life insurance may be a good fit. If you’ve been turned down for regular life insurance because of health problems, mortgage life insurance could be a good option for you, since your application is almost guaranteed to be approved without a medical exam. Although there are age limits on eligibility for mortgage life insurance, there generally aren’t health requirements. Got a mortgage and a serious smoking habit? You might want to consider mortgage protection life insurance.
For people with high-risk jobs, mortgage life insurance that pays out in the case of death, job loss or disability may make a lot of sense. That’s because it’s much easier to obtain – and cheaper – from insurance companies than straight-up disability insurance. That means mortgage life insurance is a good option for, say, skydiving instructors. If you have a dangerous job that leaves you priced out of traditional disability insurance (and you have a mortgage), consider mortgage protection life insurance as a work-around.
There’s one last group of people who could be good candidates for mortgage protection insurance: servicemembers and veterans. Why? Because the VA offers its own brand of mortgage protection life insurance separate from mortgage life insurance companies. It’s called veterans’ mortgage life insurance (VMLI). VMLI is available to servicemembers and veterans who have severe service-connected disabilities, provided they meet certain requirements. VMLI offers policies with values up to $200,000. The payout will go directly to the mortgage lender, not to named beneficiaries.
Downsides of Mortgage Life Insurance
Perhaps the biggest disadvantage of mortgage life insurance is the fact that it decreases over time. Because this type of life insurance is directly related to your mortgage principal, your benefit gets smaller as you pay your home loan off. Despite this, mortgage life insurance premiums are fixed, so you’ll continue paying the same amount for shrinking coverage.
The declining nature of mortgage life insurance also makes it an unavoidably expensive financial move. Even if you consider the cost you’re initially offered to be reasonable, the fact that your possible payout gets smaller every month makes your premiums inherently overpriced at a certain point.
It’s also worth noting that your family will not see any part of your mortgage life insurance payout. Instead, your mortgage lender will be the beneficiary of your policy. While in the end this still means your loan is taken care of, the prospect of not seeing a dime of your policy will likely make some prospective policyholders nervous.
Mortgage Life Insurance vs. Term Life Insurance
For folks with mortgages, it can be hard to decide between mortgage life insurance and term life insurance. Let’s break down the key differences between the two.
Many homeowners with mortgages choose to take out regular term life insurance. This form of life insurance provides a large pay-out designed to make up for lost income in the event of the policyholder’s death. The cost of mortgage protection life insurance, by contrast, generally has a more limited payout because it’s designed to cover only home debt.
So how do you know which one is right for you? With mortgage protection insurance, you must use the payout to settle the balance of the home loan. Regular life insurance, on the other hand, gives your family the option of using the settlement however they see fit. They can pay off the mortgage or continue it, save the money or invest it. Term life insurance is a more flexible option than mortgage life insurance.
In addition to its relative inflexibility, the other reason to approach this option with caution is the high protection insurance rates you’ll pay for a diminishing return. With mortgage protection life insurance, you pay higher premiums for coverage that decreases each year as your mortgage amortizes. With every mortgage payment you make, the value of your mortgage insurance decreases, since there’s less mortgage debt for the life insurance company to pay off. By contrast, with term life insurance a healthy person can negotiate more affordable, level premiums and get a policy with a larger payout that doesn’t lose value.
If you’re thinking about getting life insurance, your heart is in the right place. You want to protect your loved ones from financial worry and preserve the value of your estate. But if you’re in good health and don’t have a dangerous job, you’re probably better off applying for term life insurance rather than mortgage protection life insurance. With term life insurance, you’ll pay lower rates and get more. And by “more,” we mean a higher payout that doesn’t lose value as you pay down your mortgage.
Tips for Buying a Home
- Before you begin the home buying process, try to figure out how much house you can afford. This will help to ensure that you don’t fall in love with a house that’s beyond your financial means. When putting together the final cost of a home, don’t forget to take into account closing costs.
- Buying a home is one of the largest purchases you’ll ever make. Because of this, it might be worth consulting a financial advisor to make sure buying a home doesn’t interrupt your long-term plans. SmartAsset’s financial advisor matching tool can pair you with as many as three advisors in your area. Take a few minutes to answer our questionnaire so your matches are the best options for you.
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