Mortgage life insurance is designed to pay off your mortgage if you die. It can also protect you if you become disabled or lose your job, but it depends on the policy.Should you buy mortgage life insurance?
You should only buy mortgage life insurance after exploring your other options and ensuring it's the right choice for your needs. Term life insurance is more widely used than mortgage life insurance and may offer a better value, according to Dennis Merideth, a financial planner in Tucson, AZ.
"Generally speaking, mortgage life insurance has not remained as competitive a product as regular term life insurance," Merideth says.
Unlike some mortgage life insurance policies, a term life insurance policy can be used by your beneficiaries however they wish. They can pay off the home loan, pay credit card bills, fund funeral costs or for other purposes. A mortgage life insurance policy, however, pays off the bank, not your family.
In addition, mortgage life insurance benefits typically decrease over time, as the amount you owe on your mortgage diminishes. However, typically the insurance company sets your premium at a fixed rate for the life of the loan.
When seeking a life insurance policy to suit your personal needs, each product's value "is in the eye of the beholder," says Jim Whittle, former vice president and counsel at the American Property Casualty Insurance Association, now retired. Mortgage life insurance appeals most to people who have an overriding concern about making sure their home loan will be repaid if they die, he notes.
"I can envision someone [for whom] the mortgage is the major concern. Other folks may say, 'I need a broader product.'"
Standard life insurance vs. mortgage life insurance
Standard life insurance and mortgage life insurance can both be used to pay off a mortgage if the insured person dies while the policy is in force, but a mortgage life insurance policy pays the bank directly to cover the mortgage, while standard life insurance pays your beneficiary, who can then pay the mortgage and cover any other financial needs.
As with other life insurance products, mortgage life insurance is priced according to the insurance company's risk. If you have health problems, you will likely be charged higher premiums or receive a rejection, Whittle says.
Generally, people with pre-existing health conditions that make them ineligible for standard life insurance won't qualify for mortgage life insurance, either.
P.J. Garcia, the owner of Beach Pacific Escrow in Huntington Beach, CA, says a lender doesn't usually offer mortgage life insurance at the closing table. However, once the loan has closed and the sale has been recorded, offers may come pouring in.
"After closing, you will get inundated with offers like that from both the lender and third parties," Garcia says. "Everybody monitors the county recorder. It's the kind of post-closing junk mail you get: File for a homestead, get mortgage life insurance."
Offers of mortgage life insurance may play on your emotions by reminding you that your dependents may suffer financially if you are no longer around to provide for them. Younger homebuyers generally have smaller savings and often are most vulnerable to losing their homes to foreclosure if one spouse dies.
"If a surviving family has been used to living on two incomes and they lose one income, a lot of times they will not be able to keep up the mortgage payments," says Merideth.
Standard life insurance policies aren't marketed as mortgage protection products, but they offer the same benefits and often at better values. Consumer advocates say there generally is no practical reason to choose a mortgage policy over standard life protection.
Choosing a mortgage life insurance policy
Mortgage life insurance policies are more useful if they are structured to help you pay your mortgage if you lose your job, according to Garcia. Choose the policy that best suits your financial situation and fits with your other assets and debts.
While there are policies that will cover lost wages, "you have to be careful," cautions J. Robert Hunter, director of insurance for the nonprofit Consumer Federation of America.
"Sometimes there are limits on what they will pay," Hunter says. "Sometimes it is only for six months."
Financial advisers often question the need for mortgage life insurance. They say you usually are better off if you can save six months' worth of typical expenses in an emergency fund rather than buy insurance you may not need.
Hunter says it's always a mistake to purchase life insurance in connection with real estate transactions. "This is a form of credit life insurance," he says of mortgage policies. "The pitch is always the same: 'When the breadwinner dies, the house is paid off.'
However, Hunter warns that "you shouldn't think about life insurance in those terms."
"You have to think about life insurance as a much broader issue," he says. "It is not to own a house, it is to protect the family."
Mortgage life insurance: The bottom line
Much like other types of life insurance, make sure to shop around if you're interested in mortgage life insurance. Read the fine print. Make sure the policy is transferable in case you need to refinance. Check to see what exclusions are included.
Mortgage life insurance pales in comparison to term life in many cases, but if mortgage life insurance would give you the peace of mind, make sure you do your homework so you choose the best plan for you.
