Mortgage Life Insurance - Pros and Cons
Your lender may have told you that you need to purchase mortgage life insurance, a policy that pays out a benefit if you die while your home is under a mortgage. You should know what this is when you need to have it, and how to get out of it over time. Mortgage payment protection policies like this can be a good thing for some, but it only protects your lender, and that may be too limiting. Here’s what you need to know.
What Is Mortgage Life Insurance?
Many lenders require buyers to purchase mortgage life insurance. This is a policy that is taken out to cover the value of the loan you obtain to buy the home. The mortgage life insurance policy pays off the existing balance of your home at the time of your death. However, it does not pay those funds to your family. Rather, the mortgage lender is listed as the beneficiary on this type of policy. That means that, upon your death, the policy pays the mortgage lender, determines the value on the home, and pays off that value.
This is a good thing because it means your family owns the home outright now. However, it does not compensate for anything over the value of the home. That is, if you owe $10,000 on the home or $100,000 that’s all it pays out. It does not provide your family with any additional compensation.
Can You Get Mortgage Protection Insurance for Your Family?
You may also consider purchasing a term life insurance policy. This policy can be taken out by you, the homeowner. You chose the individual you want to receive the funds at the time of your death should you die while the policy is in place. You choose the amount of coverage you desire, too. If you die, the funds go to your loved one, who can use them to pay off the mortgage. With term life insurance, the beneficiary receives more funds that can help to support the ownership of the home.
How Can You Get Rid of Mortgage Insurance Over Time?
Most of the time, you need to maintain mortgage life insurance until you pay down at least 20 percent of your home’s value. In fact, this is the main reason you need to purchase mortgage insurance in the first place. If you plan to have a down payment at the time of your purchase of the home of at least 20 percent of the home’s sale price, you may not be required to obtain this policy at all. However, if you do not, and you make payments over the next few years to reduce what you owe beyond that 20 percent, you may be able to drop your coverage.
How Can You Get Lower Mortgage Life Insurance Rates?
Most of the time, mortgage life insurance rates are competitive. You cannot necessarily obtain a lower rated policy based on things like your health or your age. However, these policies tend to be in place for a set number of years, called the term. If you choose a loan term that is shorter, that may help to reduce what you have to pay in mortgage life insurance. Generally, though, the cost is based on the value of the home.
Mortgage Protection Life Insurance Through Term Policies
Which one is best then? When it comes to obtaining mortgage protection life insurance, remember that having a term life insurance policy gives your family more flexibility and the ability to have more funds in hand at the time of the home’s payoff. Imagine, for example, buying a policy for $100,000. If you die when your family has $20,000 left to pay off on the home, they get the remaining $80,000 to use to help with bills, your end of life needs, or any other needs they have.
Mortgage life insurance may not be something you can haggle with, but it is important to consider your family’s needs at the time of your death. Even if you buy mortgage life insurance, you may need to also consider an additional term life insurance policy to meet your family’s needs should you die unexpectedly with a mortgage.