Buying mortgage life insurance may seem like a good idea. After all, what would happen to your mortgage loan if you should unexpectedly die before paying it off? Would your spouse or partner be able to make your home-loan payments without the help of your regular income? Or would your partner be forced to sell the home?
These are the questions that banks and mortgage lenders ask when selling the product known as mortgage life insurance, a type of insurance that pays off the remainder of your mortgage loan should you die.
But there’s a bigger question that you should be asking: Is mortgage life insurance a smart financial move?
The answer? Usually not.
A traditional term life insurance policy is usually cheaper, more flexible and can help your loved ones pay off the mortgage anyway.
The insurance pros quoted in this story say there is only one instance when mortgage life insurance might make sense: when, for whatever reason, you can’t qualify for traditional term life insurance.
“I never recommend getting so-called insurance through any bank, mortgage company or other lending institution,” said Tammy Johnston, CEO and president of The Financial Guides in the Canadian city of Calgary. “If you want to make sure that you are protected, go through a bit of additional work in the beginning, work with a qualified insurance professional and get yourself covered.”
How mortgage life insurance works
Mortgage life insurance is a relatively simple product. You pay a fee to your bank or mortgage lender, and this financial institution will pay the unpaid portion of your mortgage loan should you die. You can often pay your premium in several ways: monthly, twice a year or annually.
The official beneficiary in these policies is the lender or bank that originates them. This means that the insurance stays with your home. If you die, the money from this policy must be used to pay off your mortgage loan. Your survivors can’t use it for any other purpose.
And that, insurance specialists say, is one of the bigger flaws with mortgage life insurance: It’s not flexible enough.
“The lender will always be named as beneficiary, not your beneficiaries,” said Christopher Huntley, founder of JRC Insurance Group in San Diego. “So your family will have no access to these funds to pay bills or debts or use for other immediate needs.”
Mortgage life insurance: Too costly?
Huntley said that mortgage life insurance policies are often overly expensive, too. That’s because these policies don’t require a medical exam. So the banks or lenders behind them will charge more to make up for the increased risk they are taking on.
Huntley said that mortgage life insurance policies can often cost 100 percent more than a standard term life insurance policy.
This is why financial pros say homeowners should invest in a standard term life insurance policy if they’re worried about what will happen to their mortgages after they die.
The term life choice
Under term life policies, you name your survivors as beneficiaries. They would receive the payout, and could then use that money to pay whatever bills they want.
“Unless you don’t trust your heirs to use the money wisely, there is no reason to buy a policy tied to your mortgage,” said Casey Fleming, a mortgage advisor with C2 Financial Corp. in San Diego and author of "The Loan Guide: How to Get the Best Possible Mortgage." “Any term life policy will do, and if you are open to policies that are not tied to your mortgage, you have the ability to shop more providers and more options. You can nearly always save money on premiums.”
Neil Maxwell, founder and CEO of Maxwell Wealth Planning in Parker, Colorado, says the best option for homeowners worried about their mortgage loan might be to take out a term life policy through their employers. This is often the cheapest source for a solid term life insurance policy, he said.
The second-best option would be for consumers to sign up for a term policy that comes with a decreasing death benefit, Maxwell said. As this type of policy ages, the death benefit gradually decreases. At the same time, the premiums you pay will gradually decrease, too, Maxwell says. This makes sense when you’re worried about a mortgage loan, because the size of your home loan will decrease over time, too.
Both of these options make more financial sense than buying insurance from your lender or bank, Maxwell says.
"The chances are that if the bank is offering you insurance that is wrapped up in your loan papers, it will not be the most competitive way to buy the insurance," Maxwell said.
The one time mortgage life insurance makes sense
When mortgage life insurance make sense
The financial pros contacted for this story said that mortgage life insurance should be a last resort. If you can’t qualify for a standard term life insurance policy, then mortgage life insurance, which does not require a medical exam, might be one way to provide financial protection for your survivors, at least when it comes to your mortgage loan.