When you’re finalizing your mortgage paperwork, it’s common to be presented with an offer for mortgage life insurance, sometimes even needing to fill out several forms if you decide against it. The emphasis on mortgage insurance during the signing process primarily arises from the fact that such insurance protects the lender by ensuring that your loan gets paid even if you passed away. Essentially, mortgage insurance pays off your entire mortgage if you die. While beneficial in some instances, for most people, regular term life insurance provides a similar safety net at a lower price.
Why Does Mortgage Life Insurance Tend to be More Expensive?
You might notice in the early stages that the premiums for a mortgage life insurance policy could mirror those for a term life insurance policy. But as time progresses, while your mortgage premium remains constant, the payout amount diminishes. This system allows mortgage life insurance companies to maintain their rates similar to term life insurance, without mandating a medical exam. However, it results in a lower premium to benefit ratio for term life insurance policies. Since mortgage insurance directly covers your mortgage, the payout shrinks as your mortgage payments progress.
Term Life Insurance Provides Greater Flexibility
Beyond cost factors, a significant difference between regular term life insurance and mortgage life insurance lies in control over benefits. With mortgage insurance, the insurer directly pays the bank holding the mortgage, which offers your dependents the advantage of having the mortgage paid off, relieving them of the continuing mortgage payments burden. However, if your dependents prefer not to keep the house, this type of insurance doesn’t offer much assistance. They would have to sell the house to derive any financial benefits. In contrast, the money from term life insurance payouts can be spent freely by the beneficiaries.
When is Mortgage Life Insurance a Better Choice?
Mortgage life insurance tends to be more suitable when you’re physically unfit to qualify for a regular term life policy. Since mortgage life insurance doesn’t necessitate a physical test or a blood exam, those with poor health generally find mortgage coverage more affordable. If obtaining traditional term life insurance isn’t an option, mortgage life insurance could provide some financial safeguard for your dependents.
However, if you manage to qualify for a term life policy, you’ll receive a higher payout for less cost. The benefits from term life policies go straight to the beneficiaries you’ve listed, allowing them to choose how they will use the funds. Financially, term life insurance typically offers a more sensible choice than mortgage life insurance, not just for you, but also for those you leave behind.
This doesn’t mean you should rush to buy a term life insurance policy immediately, equivalent to your mortgage’s value. It will ultimately depend on your unique circumstances. For example, would you be able to keep paying the mortgage if you lost your spouse or they lost you? If the answer is no, you should consider getting a life insurance policy. However, if you or your spouse could individually afford the mortgage payments and have little debt, you may not require life insurance at all.
