Mortgage Life Insurance
A new mortgage brings with it new benefits – and new, significant financial obligations. In most cases, a house is your family's greatest asset, but at the same time, a mortgage is likely your biggest monthly expense. A mortgage life insurance policy is a specialized insurance product meant to protect your loved ones should you pass away. Faced with the sudden drop in the family income, your survivors may be unable to continue making mortgage payments. Mortgage life insurance is meant to safeguard them from that.
When you purchase mortgage life insurance, you are, in effect, purchasing a term life insurance policy whose benefit amount is the same as your mortgage balance. That is a very important factor to remember: The death benefits of a mortgage life policy will always be exactly equal to the remaining balance of the mortgage. This means that after you've paid off half of your mortgage, your insurance benefits will have also dropped by half. The premiums, however, are balanced over the entire term, and will not change.
Why not Buy Term Insurance?
Term insurance, which simply pays out the death benefits to your survivors, may indeed be the better choice. One reason to consider term life rather than mortgage life insurance is that the death benefits do not decrease over time. If you are insured for $500,000 and have a mortgage for the same amount, your survivors will receive that amount, and have the option to pay off the mortgage, but may also invest the money instead, and use the interest to continue paying the moorage. Furthermore, if upon your death the mortgage balance is only $300,000, the insurance policy will pay out $500,000, leaving your loved ones with $200,000 over the amount mortgage life insurance would have paid out. Another advantage a term life policy offers is its relative stability when compared to mortgage life. Most banks will require you to re-negotiate your insurance policy if the mortgage is transferred to a different property or refinanced. Since you will be older at that point, your premiums will most likely be increased. A term life policy remains valid until the specified term runs out, provided you keep paying the premiums, which do not change for the length of the term.
Mortgage life insurance offers you the convenience of unified mortgage and premium payments, but that convenience may come at a higher cost than you are willing to pay. Your bank will generally only have one insurance policy, which may not be ideal for your unique situation. An insurance broker, who can help you shop around for a policy, will have a much wider selection to offer you, increasing your chances of getting a better price.