Chances are, you were offered something called mortgage life insurance by the bank when you purchased your last home. Even if you weren’t, you’ve probably received something in the mail telling you how much you need it. I got probably two or three of these letters every month during my first year of home ownership and always laughed as I tossed them in the trash. Plenty of people must be buying it to justify all the advertising, but for the life of me I can’t figure out why. These policies are seriously flawed to the point of being a rip-off.
What Is Mortgage Life Insurance?
In short, mortgage life insurance is a special sort of life insurance policy that promises to pay off the balance of your mortgage in the event of your death or disability, freeing your loved ones from having to worry about making a mortgage payment every month. Sounds great, right? Not so much. This is not to be confused with Private Mortgage Insurance (PMI), which is usually required by your lender if your down-payment totals less than 20% of your home’s value. Mortgage life insurance is completely optional and if you’re smart, you’ll avoid it.
Why Mortgage Life Insurance Is A Rip-Off
Sparing your loved-ones from the horrors of having to scrape by enough money to pay the mortgage every month in the event if your untimely demise sounds great on the surface until you consider there are far better and cheaper ways to accomplish the same thing. Mortgage life insurance has a few characteristics that makes it highly undesirable.
- Decreasing Benefit – As you pay down your mortgage over the years, the value of your mortgage life insurance policy goes down with it, since the insurer is only on the hook to pay off the balance of your mortgage when you die. If you happen to die in year 29 when your balance is down to $5,000, that’s all your family will get. Meanwhile, your monthly premium stays the same even as the potential payout decreases.
- It Insures The Bank, Not You – Banks don’t want you to know this, but mortgage life insurance is really insurance for them, not you. Banks know that if the breadwinner of a family dies, the probability of that family defaulting on their mortgage skyrockets. These policies really exist to help protect the bank from losing money. That the banks have been able to convince their customers to foot the bill for their own insurance premiums is a brilliant business move, but that doesn’t make it a good deal for you.
- It’s Expensive – At only a few cents per day, these types of policies may seem cheap, at least until you compare the premium to the actual expected payout. Unless you die within the first year of owning your home, the actual payout is going to be far less than your original mortgage amount. Since the chances of a young homeowner dying are extremely low, most of those who collect end up doing so years down the road when their mortgage balance (and thus benefit) has already shrunk significantly.
Term Life Insurance Offers Better Coverage For Less Money
The main reason mortgage life insurance is undesirable is because term life insurance offers much better coverage for only a little more money (and in some cases less). Head over to an insurance quote site such as InsureMe.com and enter your zip code. Running the numbers, a healthy 29 year old can get a $1,000,000 20-year term life insurance policy for right at $40 per month while a moderately-healthy 39 year old can get the same $1,000,000 policy for about $60 per month.
That $1,000,000 life insurance payout is likely going to be much larger than your mortgage, for starters, and the benefit amount will never decline. Even if you die the day before your policy expires, your beneficiaries will get the entire $1,000,000. By contrast, your beneficiaries would be lucky to get $500 were you to die the day before your mortgage life insurance policy expired.
Before you even consider purchasing a mortgage life insurance policy, I strongly recommend you get a few term life insurance quotes, just to see where you stand. I’m pretty confident you’ll find that term life insurance is by far the better financial decision.
So Are There ANY Legitimate Uses For This Type Of Insurance?
Even poor tools are occasionally useful in spite of themselves. A few situations where you might want to consider this type of policy:
- There are low or no health hurdles – These types of policies don’t usually require a health screening, so homeowners with certain kinds of health problems may find mortgage life insurance to be their only option. That said, many employers offer at least a moderate amount of screen-free term life insurance as a benefit of employment, so I would be sure to exhaust that avenue before thinking of buying a mortgage policy. And what if you’re unemployed? The point is moot because you probably wouldn’t be able to afford your mortgage anyway at that point. But as a last resort, yes, mortgage life insurance is a workable option.
- It might be cheaper than term life insurance coverage for the first few years – It’s possible the mortgage policy would be cheaper over the first few years of the load (while the benefit amount was still high) than traditional term coverage. Thus, you could make a case of going with the mortgage policy for say, 4 or 5 years, canceling, and then purchasing a term policy. I’m not a fan of this approach because it’s a big hassle to save what amounts to a very small amount of money (we’re talking probably less than $200 or so over 5 years). Perhaps you don’t mind the hassle, though. More power to you.
- You’re old – It’s probably going to be more difficult to get a reasonably-priced term life policy if you’re past retirement age.
But even if you do decide to look into mortgage life insurance, I urge you to at least get a few term life quotes just to see what else is out there before you pull the trigger. It’s free and it could save you a lot of money.
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