Right after you buy or refinance a house, your mailbox gets flooded with all kinds of offers related to that transaction. You’ll see flyers for insurance, home warranties, service providers, and applications for mortgage life insurance. How do you weed through the information to figure out which one to take? While I can’t help you with picking who does your lawn, I can give you some insight into mortgage life insurance. Let’s dive in!
What is Mortgage Life Insurance?
This is a type of life insurance tied directly to your mortgage. The idea is that if you died while you still owe a mortgage, then the policy would guarantee the mortgage is paid in full. My time as a life insurance agent taught me that getting the mortgage paid off tends to be the number one financial concern for married couples if one of them passes away. It ranked higher than money concerns for education, funeral expenses, and an inheritance for the children.
Mortgage life insurance policies are a type of “decreasing term” policy. This means the death benefit goes down over time. The reason for it being a decreasing term instead of a level term is that the value of your mortgage decreases over time, and the policy’s sole purpose is to pay off the mortgage and nothing else. If it was a level term policy, you’d have more leftover after the mortgage was paid, depending on if and when you died. The policy will last the same amount of time as the mortgage and no longer. Once the policy is done, premiums stop and there is no more death benefit.
Is it a good idea to pay off the mortgage in the event of death?
Yes! You don’t want your surviving spouse to risk losing the house in the event of death. As I mentioned above, this belief has been the most consistent I’ve seen across life insurance applicants. You don’t want to see a “For Sale” sign go up shortly after a death because of finances. There are multiple types of policies to guarantee the ability to do this. Mortgage Life is one option.
Is Mortgage Life Insurance the best option?
The only time I would recommend somebody buying this type of policy is if they can’t qualify for a life insurance policy any other way. Maybe their health isn’t good enough to purchase life insurance, but the mortgage life policy application offers a guaranteed minimum amount. I apply the same reasoning to life insurance purchased through your job.
There are five reasons I recommend buying a separate policy to pay off your mortgage instead of buying a mortgage life policy.
1) Mortgage Life is typically less cost effective than a separate policy. Policies are compared based on the “cost per $1,000 of coverage,” meaning how much premium does it cost to buy each $1,000 block of life insurance? In most cases, the cost is less for a separate term policy than it is for mortgage life.
2) Your need for life insurance is always greater than your mortgage balance. It’s funny how often people believe that if the house is paid off then the surviving spouse will be fine. But what about the following common expenses: funeral, medical bills associated with the death, counseling for survivors, loss of income, day-to-day expenses of living that continue for survivors, etc.? Do you really think that removing the cost of the mortgage alone will more than guarantee your surviving family will have enough money to pay for all these things? What if the person who died was the primary breadwinner? To put it bluntly: the surviving spouse WILL have more than the mortgage payment to worry about regarding finances. If you purchase a policy large enough to cover your mortgage plus all these extras, and your house gets paid off but the policy is still in force, your surviving spouse WILL find uses for that money.
3) Statistics say most people sell or refinance their house every 5-7 years. Using those numbers, you could move 6 times in a 30 year period. Do you want to buy 6 separate mortgage life insurance policies during that time? Your cost of insurance goes up on each purchase due to your older age. If you bought a 30-year level term policy at the very beginning, you’d still pay the same premium during that same timeframe. It would give you one less application to sign with each housing change. One less thing to worry about would be a great thing considering how much is involved with buying and selling a house.
4) There are always more options available to you under a separate policy. As I’ve said, a mortgage life policy is only designed for one thing-pay off the mortgage if you die. A separate term or whole life policy will include various riders that increase what you can do with it. On top of that, nobody is going to force you to spend the death benefit a certain way. For example: if there is an exorbitant hospital bill associated with your death that is over $100,000 and all you have is the mortgage life policy, then your surviving spouse must pay that bill. If you have a separate life policy, it’s up to your spouse how it gets spent. That person may decide to pay all the hospital bill, some other expenses, part of the mortgage, and then refinance the house. There are numerous ways it could play out. The point is that there is a lot more flexibility available to the survivor with a separate policy. Another example is that you could have purchased a 30 year paid-up whole life policy at the beginning. Then, if you pay off the mortgage in 30 years and are both still living, you have a policy that requires no more premiums. It’s now completely paid up with a death benefit.
5) You have nothing to show for it if it reaches maturity. If you stay in the house 30 years and never refinance and pay off the mortgage, you have nothing to show for all those premiums you paid. This is true of ALL term policies. A permanent life insurance policy(like a whole life) will likely have a nice cash value built up after 30 years of premium payments. If you chose that type of policy instead, then all the money won’t feel wasted.
*Discussing term and whole life is a complicated topic, so I realize there is a lot of information I didn’t address here. For more information, check out my articles on this topic.
I certainly recommend having something in place to pay off your mortgage at death. So, even if my advice doesn’t convince you to go outside of mortgage life, then buy the mortgage life! If you’re healthy enough, it always makes sense to purchase life insurance outside of a mortgage life policy. Make sure your death benefit in your separate policy is greater than your mortgage balance from the very beginning, because your need for life insurance will always be greater than your mortgage.
