When you’re investing in a home, whether it’s your first, last, or somewhere in between, what will happen to your home if you pass away?
Unfortunately, death is a part of life, and it should be something you think about during the mortgage process.
If you are married and buying a home with a partner, what will happen if you aren’t there to help cover mortgage payments?
That’s a great question.
Mortgage life insurance, also called mortgage protection insurance (MPI), is there to protect your investment, and your family, by ensuring your mortgage can be paid back if you as the policyholder were to die or become incapacitated.
Or is it?
Although almost everyone who is looking into a mortgage will encounter an offer for this type of policy, very few know what it is or what it does.
Fortunately, mortgage life insurance is a very straightforward type of coverage, and we’ll explain why it’s not a valuable purchase at all!
(There’s really only ONE time we recommend it, but we’ll get to that in a moment… read on.)
Why Mortgage Life Insurance Is A Bad Buy (seriously)!
As is implied by the name, mortgage life insurance is a policy you can set up with an insurance agency or bank to pay off your mortgage should you die before the loan is paid off.
Some policies will also pay out if a policyholder is diagnosed with a terminal illness and is not expected to live more than 12 months, or if the policyholder is incapacitated and will never be able to work again.
The payout of this type of life insurance goes directly to the mortgage lender, not to your family members.
The payout is also meant to match the mortgage value, so the potential payout for this type of insurance decreases over time.
If for some reason you fall behind on payments, the insurance value will often remain on its original schedule so that it won’t keep up with any new or outstanding debt.
The law does not require mortgage life insurance. In some cases, the law does require private mortgage insurance, however, which is often confused with mortgage life insurance.
Differences Between PMI and Mortgage Life Insurance
Private mortgage insurance (PMI) doesn’t actually protect you as the borrower; instead, it protects the lender.
In the United States, it is often required for those who put less than 20% down on a home have PMI until the mortgage is less than 80% of the value of the home.
PMI works for your lender regardless of the reason you are no longer able to pay your mortgage.
So, if you die or if you default for another reason, the lender is protected and does not lose money if they cannot resell your home for the price of the initial mortgage.
Both of the insurance types mentioned here will vary in price depending on the price of your home.
PMI, for instance, is typically about one-half of one percent of the mortgage amount. Mortgage life insurance costs, however, will also depend on other factors, like where you get your policy.
Are There ANY Benefits of Mortgage Life Insurance?
The main advantage of purchasing mortgage life insurance is the convenience and comfort.
You know your home and family will be protected after you’re gone.
If you’re denied term life insurance or whole life insurance because of age or medical conditions, mortgage life insurance may be the perfect option for you, since a medical exam is not usually required to purchase this type of plan.
This is probably the only reason we would recommend it! It’s a last resort.
You are usually offered this insurance during the signing of the rest of your paperwork for your initial mortgage, making it simple to start your policy.
Mortgage life insurance is often sold as a supplement to other types of life insurance policies as well, so you don’t have to worry about the life insurance you or your spouse may be offered at work going toward the mortgage instead of other more immediate or unexpected expenses.
But the fact is, it will actually be more expensive to do it this way than to simply increase your own policy!
Both life insurance and mortgage life insurance can also be used, with a few exceptions, if you become incapacitated or are unable to work due to disability.
Now, once your home is paid off, your insurance premiums end immediately, so you don’t have to worry about canceling the policy if you keep it through your whole journey to home ownership.
Some insurance companies allow you to purchase mortgage life insurance in a bundle with other types of insurance, such as auto or homeowners, at a discounted rate.
Of course, it rarely makes financial sense to bundle life insurance with home, auto, and others.
The BIG Drawbacks of Mortgage Life Insurance
1. As you pay down your mortgage, your premiums on mortgage life insurance do not decrease.
So you end up paying the same premium when you owe $100,000 as you do when you owe $10,000, for example.
2. The money is paid directly to the lender when you pass away, so if for some reason you are ahead of schedule on payments, your family likely won’t see the difference of the benefit amount and the amount owed on the mortgage.
Mortgage life insurance is built to help only with your mortgage, not other bills that may come up after you are gone.
For this reason, most lenders and insurers recommend using it as a supplement for another type of life insurance (though we know it’s WAY cheaper to not do it this way). Having two kinds of life insurance will naturally increase the overall cost to you.
3. This type of insurance can be expensive for the amount of coverage you receive.
In the beginning, your premiums will be inline with the coverage you receive, but as time goes on you are covered less for the same amount of money. It is essential to shop around for quotes before committing to this type of policy.
Some mortgage life insurance policies will not allow you to refinance your home’s mortgage and keep your policy, so it’s important to note this when you are looking for initial quotes.
Finally, some policies will only cover your mortgage if your death is accidental, meaning a diagnosis of terminal illness will keep you from being covered.
Since terminal illnesses are also costly, you need to ensure the policy you choose covers you in all scenarios.
Is Mortgage Life Insurance Right for You?
Generally speaking, it is important for you to take a look at your overall financial situation before making this decision, but the general consensus is NO!
If you are the number one breadwinner in your home, having life insurance on your mortgage may be what you need to ensure your family’s comfort after you’re gone, but a regular term life insurance policy is all you need.
Mortgage life insurance is primarily beneficial to those who would NOT BE APPROVED for more traditional life insurance policies due to age or health.
Not all policies are created equal, however, so be sure to look around for the best price and even bundle if you can.
Also, ensure you are getting a policy that is flexible if you would like to refinance your home someday, and that will cover your mortgage regardless of the reason you need to cash in.
If the mortgage is only covered in the case of accidental death, you’ll want to pass.
Hold Off On Buying MPI (unless it’s all you can get).
Mortgage life insurance is a straightforward way to ensure your family will have a roof over their heads once you are gone.
It is important to note that every policy is different, so you will want to shop around as soon as you decide it is right for you, and likely while you are still in the process of getting your mortgage.
Be sure to ask questions of possible insurers so that you have the most information possible before committing to a plan.
Finally, don’t forget that these types of policies are excellent supplements to existing life insurance. You don’t have to choose just one.