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Mortgage Life Insurance – Worth The Investment?


Homeowners are faced with many decisions when purchasing a home. Making sure that they have the right insurance to protect their investment and their family is one of the most important decisions they will make. Yet with the variety of insurance products available – homeowner’s insurance, warranty insurance, title insurance, flood insurance, private mortgage insurance, mortgage life insurance, etc. – picking the right policies and coverage can be tricky. Two of the most frequently confused insurance products, and the focus of this post, are private mortgage insurance and mortgage life insurance.

Private mortgage insurance (PMI) is a lender-required insurance product that protects the lender against mortgage defaults for borrowers who have less than 20% equity in their property. The policy, paid for by the borrower, is often cancelled after the borrower has obtained over 20% equity in the property. Mortgage life insurance, on the other hand, is a voluntary insurance policy that will pay off your mortgage in the event of your death. While it is nice to know that your mortgage will be paid off and your family will not have to worry about losing their home, mortgage life insurance may not be the best way to achieve this peace of mind. Below are several drawbacks of investing in a mortgage life policy:

  • Over the long term, mortgage life insurance can be an expensive insurance product. Unlike a term life policy where both annual premiums and the death benefit/ payout are fixed over the term of the policy, the death benefit /payout of a mortgage life insurance policy decreases over time. That is because the payout amount of the policy is based on the outstanding balance of your mortgage. As your mortgage declines so does the payout amount, yet in most cases your monthly premiums remain fixed during the life of the loan. For most borrowers, purchasing a cheaper term life policy with fixed premiums and payout is a better investment.
  • The beneficiary of a mortgage life policy is the lender. This means that upon your death your heirs will not receive any money from the policy. If this is the only type of life insurance policy you have, your family will no longer have stress over monthly mortgage payments but could have difficulty paying day-to-day bills. How your heirs intend to use the property after your death should also be considered when investing in a mortgage life policy. If they are likely to sell, then using the premiums that would have gone to a mortgage life insurance policy to purchase or increase the coverage on a term life insurance policy is the wiser approach.
  • Unlike a term life policy that stays with you regardless where you live, a mortgage life policy is linked to your mortgage. If you sell the property or payoff the mortgage before your death, the policy is cancelled.

While a term life policy is generally a better option than a mortgage life policy, there are certain situations where a mortgage life policy does make sense. If you have health issues that make obtaining a term life policy impossible or very expensive, then a mortgage life policy may be your only alternative. Additionally, if your heirs intend to continue living in the home after your death but you think they would blow through a life insurance payout on new cars and trips instead of paying off the mortgage, then a mortgage life policy would be a good investment.

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