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?
Mortgage Life Insurance Basics
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 required for FHA loans, because it’s not required by the lender. Instead, it’s an optional measure some people take to protect their family’s biggest asset, their home.
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, the payout must be used 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. But before you write off mortgage life insurance, read on to find out when it might be a good idea.
When Mortgage Protection 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.
If you’re thinking 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. We applaud those instincts! If you’re in decently 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.
Photo credit: ©iStock.com/JackF , ©iStock.com/Courtney Keating , ©iStock.com/Pamela Moore