Posted : 02/22/2011
After your home loan closes, you will likely receive offers from insurance companies for mortgage life insurance.
Unlike private mortgage insurance (PMI) – which is required for loans with low down payments and protects lenders from default – mortgage life insurance is designed to pay off your mortgage if you die.
But if you plan to buy life insurance, consumer advocates say you will be better off with a standard life insurance policy rather than one tailored to pay your mortgage.
Dennis Merideth, a financial planner in Tucson, Ariz., says term life insurance is more widely used than mortgage life insurance and may offer a better value.
"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 – whether to pay off the home loan 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 that 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, assistant general counsel of the American Insurance Association. 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.'"
Although you may decide mortgage life insurance isn't for you and your family, most homebuyers need some form of life insurance protection.
"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.
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 whose pre-existing health problems make them ineligible for standard life insurance cannot use mortgage life insurance as a substitute.
P.J. Garcia, the owner of Beach Pacific Escrow in Huntington Beach, Calif., says mortgage life insurance seldom is offered by a lender 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.
Standard life insurance policies are not 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.
There are many varieties of mortgage life insurance, but Garcia says policies are more useful if they are structured to help you pay your mortgage if you lose your a job.
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."
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