Having a mortgage will be one of the greatest investments and financial responsibilities you take on in your lifetime. The average mortgage is 25 years, meaning you are dedicating a quarter of a century to repayments. What would happen if you died tomorrow, but still owed money on your home? Who would pay off the rest of your mortgage? Did you know that mortgage life insurance is an option? Consider the following scenario from the Complete Reality Group.
“John worked running his own construction business. The income was good and it was enough for his wife, Laura, to stay at home with their two boys, Randy and Jimmy and even enough to look for a larger home for their family.
When looking for a home they made sure to take all of necessary steps needed to get pre-qualified for a mortgage and to find perfect home for their family. Once they were pre-qualified for a mortgage they found a list of homes they were interested in, hired inspectors and lawyers, and got down to business.
Then came up the question of mortgage life insurance; neither of them had ever heard of it before and needed to research it for more information. They visited some different websites and learned about different advantages and disadvantages of mortgage life insurance. They discussed the possibility of something happening to John and him not being able to work or pay the mortgage. They decided they needed the extra protection.
It was a good thing that they did. In late 2007 John passed away in a fatal construction accident while working on the side of a 10 story building. Laura was left without an income or a means of paying her monthly bills let alone the mortgage. Luckily, they had purchased mortgage life insurance and that $892 a month mortgage payment is not a worry for the future of Laura and her family.”
Purchasing mortgage life insurance, or mortgage payment protection service, will help to protect your family, should the worst happen.
Mortgage life insurance (MLI) is a type of security for your heirs upon your death. If you pass away before completing the payments necessary to own your home, then MLI will cover the difference. The coverage is offered through the mortgage company or bank and the beneficiary of the policy is almost always the mortgage company. However, you may have the option to choose your family members, in which case they would have the choice whether or not to pay the remaining mortgage. In some instances, there is more pressing debt that needs to be addressed first. This type of policy is often offered on the open market as term life insurance.
In most cases, however, your family will not see any of the money attached to the MLI if you die. Instead, it will go directly to the bank that holds the home loan.
Decreasing term: As the outstanding mortgage debt decreases, so does the size of the policy.
Level term: The size of the policy never decreases. Level term insurance is for those with an interest-only mortgage.
- The policy you choose will depend upon your current and predicted finances. The best way to decide is to speak with your independent insurance agent and mortgage loan company.
Deciding to Buy MLI
There are several reasons why you might be compelled to purchase mortgage life insurance:
You have a pre-existing health condition that prevents you from purchasing regular life insurance.
You want a plan that is convenient and can be written quickly.
You are unable to make at least a 20 percent down payment when purchasing a home. Your lending agent may require you to purchase Private Mortgage Life Insurance (PMI).
You want additional peace of mind for your family.
In general, purchasing a regular life insurance policy is recommended, as it is more flexible and costs less. However, broad acceptance procedures make it an attractive option for some.
The cost of mortgage life insurance is generally higher than whole or term life insurance policies. Compiled with the fact that the premium is often added to the cost of your monthly mortgage payment, the payment is much more.
Andy Albright of the National Agents Alliance has estimated the average costs of mortgage life insurance.
“The national average for a mortgage balance is $120,000. For such a mortgage, you would pay roughly $50/month for a bare minimum policy. If you want to add riders (such as ‘return of premium’ or living benefits), you could end up paying as much as $150 a month.
That comes out to $600-$1,800 a year out of the policyholder’s pocket. Not surprisingly, only about 2% of American homeowners have mortgage insurance, Albright says.”
One reason MLI is not very popular is because your premium payments never decrease. Even as your loan amount drops, and consequently the benefits of having MLI, the premium stays the same.
To demonstrate the differences between the costs of a mortgage life insurance policy and a regular life insurance policy, consider this:
“Take an example of a male non-smoker, age 31, with a $250,000 mortgage. The average monthly premium for 10 years for life insurance […] would be just over $23 per month. A major bank’s mortgage insurance for the same amount would cost just over $32 per month (40% more). In addition, at the end of 10 years the [life insurance] coverage would still be $250,000, while the mortgage insurance policy would have reduced by over $50,000 to reflect the current outstanding mortgage. “
Advantages and Disadvantages
The primary advantage to purchasing mortgage life insurance is to ensure that your home loan debt is covered after you’re gone. The lender will usually offer it to you during the mortgage closing procedures. Additionally, having a policy in which the money is paid directly to your heirs rather than the mortgage company, provides additional debt payment options.
People that have high blood pressure, diabetes, or other health problems would likely qualify for mortgage life insurance when other forms of life insurance would reject them. Usually, there is no medical examination or blood test to verify your qualifications. As stated by HomeGuides, “Even in cases when an individual with a health problem qualifies for a term life insurance policy, the premium rates are usually much higher. A homeowner cannot be denied coverage for mortgage life insurance despite her medical history. Most times, a physical examination is not required to purchase a policy.”
There are also some disadvantages to mortgage life insurance policies. For example, the premium you pay often goes directly into your home loan. This means you have to pay finance charges on your premium payments. Unlike other life insurance policies, MLI is non-transferable. Also, it doesn’t have a savings account from which you can borrow money.
Keep in mind that MLI does not cover funeral or burial expenses. It also will not cover any other debts you may have. You would need to purchase both an MLI policy and other debt-protection coverage.
You may have additional questions on the subject of mortgage life insurance. The answers to some of the more frequently asked questions are below.
Q: What if I decide I don’t want mortgage life insurance when I take out my home loan?
A: The mortgage company will require you to sign a waiver stating that you do not want coverage. In doing so, you recognize the risks associated with dying prior to completely paying off your loan.
Q: Is mortgage life insurance worth the costs?
A: As with everything, there are pros and cons. Review the advantages and disadvantages section of the article and speak with your independent insurance agent to make an informed choice.
Q: Should I buy a mortgage life insurance policy?
A: Be sure to estimate the amount of your loan, terms of the loan, and the value of your house. Compare that to your family’s overall assets and your general health. This will help you to determine if this type of policy is right for you.
Q: Is it better to by mortgage life insurance or a regular life insurance policy?
A: When in doubt, speak to your banker. In an article by Jeff Rose of Good Financial Cents, he conducted an interview with his banker on this topic. Here is what the banker had to say:
“We do offer it [mortgage life insurance] with our mortgage loans. Premiums vary on a wide range based on loan amount, age of borrowers, and use of tobacco products. One advantage is obtaining life insurance with few questions to answer and almost no underwriting. Disadvantage is the cost is marginally higher than level term, but mortgage life is decreasing term and pays no benefits to the borrower. It pays the benefit to the borrower and the bank to pay off the mortgage.
I recommend to borrowers to look into level term before deciding on either one to compare the cost and benefits. I would prefer to have the benefits paid to the beneficiary and then they can decide how to use those funds. A good example is within the rate environment we have right now. If I have a interest rate below 5%, it may be in my spouse’s interest to take the life insurance funds and pay them out in a monthly benefit or invest the whole amount, rather than paying off a low interest mortgage. With mortgage life you don’t have that option.”
Speak with your banker or insurance agent today to find out if this policy is right for you.
Other Enhanced Insurance articles related to Forms of Life Insurance:
Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.
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