Mortgage Life Insurance
You may be considering mortgage life insurance to cover the balance of your mortgage should a primary earner die. Many people purchase mortgage life insurance directly from their bank whenever they renew their mortgage. While this may seem the easiest route, it may not be the least expensive – or the best available product.
Mortgage life insurance is considered by the insurance industry to be ‘decreasing term insurance’. There are two aspects of the product you should be initially considering. The first is the amount of insurance that will be paid out, the second is the premiums or the cost of the insurance.
Mortgage life insurance compared to level term life insurance (amount of insurance):
The insurance industry also offers a product called term life insurance with many similiar features to mortgage insurance. Both term insurance and mortgage life insurance offer a fairly pure type of insurance with a death benefit that is payable upon the insured’s death, no cash values, and relatively inexpensive premiums compared to other insurance types. In fact, mortgage life insurance is a subset of term life insurance.
The death benefit for mortgage life insurance is tied to your mortgage balance. As you pay down your mortgage the death benefit is lowered to exactly match the remaining balance of your mortgage.
With most term life insurance products the face amount remains level as long as the policy is in good standing. The insurance amount is not tied to your declining mortgage balance. In the event of your death this remaining balance can be paid tax free as a death benefit to your dependents.
Mortgage life insurance premiums compared to level term life insurance (premiums or cost):
Mortgage life insurance premiums are level and remain that way during the life of your policy. As noted above however, the actual insurance amount is declining. If you start off paying $300 per year to cover a $200,000 mortgage, in twenty years if you have only a $50,000 mortgage you are still paying the same $300 premium to cover the $50,000 mortgage.
With level term life insurance, you can choose from a variety of durations or ‘terms’. If you choose a 30 year term life policy, premiums would remain level for 30 years – as would the amount of insurance coverage. So in twenty years you would still be paying the same $300 premium (just like the mortgage life insurance) but your insurance amount would still be $200,000.
Perhaps more importantly when you are dealing with an insurance broker they can shop from a variety of different companies. As the term life insurance marketplace is well-shopped and very competitive it’s common for a broker to be able to find you a term life insurance policy – with a level death benefit – that is in fact less expensive than the same amount of mortgage life insurance.
Term life insurance benefits:
It’s probably clear by now that term life insurance can be a superior product to mortgage life insurance. You can probably get the same amount of insurance at a cheaper price. The insurance coverage remains level even as your mortgage decreases.
Here’s a few more pros to term life insurance:
- Portability: You are the owner of the insurance policy and can maintain this insurance without regards to your mortgage. If you change mortgage companies, you will continue to have the same life insurance policy.
- Convertibility:Many term life insurance plans allow you to convert the term life insurance to a permanent life insurance policy. If you find in 15 years that you are uninsurable, a convertible term life policy will let you easily upgrade to a permanent life insurance policy (ableit at a higher premium).
- Choice of Beneficiaries: With mortgage life insurance, any death benefit is paid out to the morgtgage holder, typically the bank. With term life insurance you can determine who should receive any death benefits. One aspect might be to have the bank or mortgage holder be the beneficiary up to your mortgage amount, with your dependents receiving any remaining funds.
Add it all up, and you may be able to get mortgage life insurance with a better death benefit at a cheaper cost just by shopping around.
We suggest you also read our term life insurance section here to get a better idea of how term life insurance works. And if you already own mortgage life insurance, or are considering purchasing some we suggest you use our life insurance quoting system to quickly shop from about 150 life insurance companies. If the prices compare favorably (and they should!), feel welcome to contact us for a further discussion or to begin the application process.