If you’ve bought a house recently, you’ve probably received a ton of mail warning you to protect your mortgage payments with life insurance.
What those letters are usually selling is a specific type of life insurance – mortgage life insurance, also known as “mortgage protection insurance.” But mortgage life insurance is not the same as the more common term life insurance.
Here’s what every homeowner should know when comparing the two types of insurance.
What Is Mortgage Life Insurance?
Don’t confuse mortgage life insurance with private mortgage insurance (PMI), which you may need to pay along with your mortgage if you put down less than 20% on your home.
Mortgage life insurance pays off your mortgage balance if you die. It lasts for the same number of years as your mortgage, and you’d usually purchase the policy when you buy your home or soon after.
Terms and conditions vary, but in most cases, if you were to die during the policy term, the lender would receive a payout (called a “death benefit”) for the amount you owe on your mortgage. As you make mortgage payments, and your balance goes down, the death benefit on the insurance policy goes down, too.
Mortgage Life Insurance Doesn’t Require a Medical Exam
One of the convenient things about mortgage life insurance is that it’s easy to get. Typically, no medical exam is required in the underwriting process. This is especially helpful for people with a pre-existing condition or an illness that either disqualifies them from other types of life insurance or pushes their life insurance rates to an unaffordable level.
Mortgage Life Insurance Payout Usually Declines Over Time
For many buyers, the mortgage life insurance payout amount declines over time because it’s tied to the mortgage balance which will decrease as the homeowner pays off the loan, reaching zero when the mortgage is paid off.
If your policy has level premiums, the amount you pay every month does not change, even though the value of the policy goes down.
Remember that the lender is the beneficiary of a mortgage life insurance policy, not a policyholder’s loved ones as with a term life insurance policy.
Mortgage Life Insurance Usually Costs More Than Term Life Insurance
Another downside is that because you don’t have to undergo a medical exam and the insurance underwriting process is less precise, the price of mortgage life insurance will usually be higher compared to that of a comparable term life insurance policy that is medically underwritten.
Some Mortgage Life Insurance May Restrict Death Benefits
Some mortgage life insurance policies will pay a death benefit only if you die from an accident, similar to accidental death insurance. Generally, term life insurance has fewer exclusions on whether a policy will pay out death benefits – usually suicide within the first 2 years or an illness that was intentionally not disclosed in the application process.
Mortgage Life Insurance Payouts Go to Lien Holders, Not Loved Ones
A mortgage life insurance payout goes directly to the mortgage lien holder. The payout can only be used to pay off the mortgage. Your loved ones don’t get a chance to use the death benefit in a way that may be more important to them.
What Is Term Life Insurance?
Term life insurance provides protection for you and your family for a set period of time.
The key characteristic of this type of life insurance is in its name — the “term” length of the policy. That’s the number of years the policy provides protection for your beneficiaries. Common term lengths are 10, 15, 20 or 30 years. If you were to pass away during your coverage term, your policy death benefit would go to the beneficiaries you designate.
Pros of Term Life Insurance
Term Life Insurance Coverage Is Personalized to Your Family’s Needs
Term life insurance coverage offers flexibility and personalization that you can’t get from mortgage life insurance.
You can decide how much financial protection is needed, instead of merely having an amount that covers your mortgage. Not sure how much that is? No problem. A life insurance calculator can look at your income, family structure and debts to help you determine the right policy for you.
Term Life Insurance Is More Affordable Than Mortgage Life Insurance
As we have mentioned before, term life insurance typically costs less than a comparable mortgage life insurance policy.
For example, according to State Farm, a 30-year, $250,000 mortgage life insurance policy would start at about $66 per month for a 35-year-old man in excellent health. Or, that man could buy a 30-year, $250,000 Haven Term policy starting at $30 per month.
Term Life Insurance Payout Goes to Your Loved Ones, Not Your Lender
With term life insurance, your beneficiaries decide how to spend the death benefit, rather than the money going to your mortgage lien holder, as it would with mortgage life insurance.
Term Life Insurance Coverage Stays the Same
Unlike with most mortgage life insurance, the death benefit from term life insurance doesn’t decrease over time.
Cons of Term Life Insurance
Term Life Insurance Usually Requires a Health Screening for Approval
Unlike for mortgage life insurance, to get term life insurance, you will have to do a health screening, and in some cases, a medical exam. Having to undergo a medical exam doesn’t mean you won’t get a great price on term life insurance. Rather, it means the insurance company needs more information about you to give you an accurate rate.
Why Your Home Needs Life Insurance Protection
Your home is more than just four walls and a roof. Even if it’s a work in progress or a starter home that you plan to sell in a few years, protecting your investment is a must. If you died, you wouldn’t want your family to struggle with the house payment and risk losing the stability and financial benefits your home offers.
Now that you know the pros and cons of mortgage life insurance and term life insurance, you can make an informed decision about coverage that protects one of your biggest financial assets and gives you peace of mind so you can enjoy your home.
What questions do you have about mortgage life insurance and term life insurance? Let us know in the comments below.
Tom Anderson is a writer at Haven Life.
Haven Term is a Term Life Insurance Policy (ICC17DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In NY, Haven Term is DTC-NY-1017. Our Agency license number in California is OK71922 and in Arkansas, 100139527.
Source: Home Loans