November 16, 2020
Buying a home? Congratulations!
But wait… don’t jump at buying a mortgage life insurance policy. It might seem like a good idea while you’re chatting with the agent. After all, you’ve been meaning to take out a life insurance policy anyway.
However, if you take the time to research, nearly everyone will find that a term life insurance policy turns out to be a better buy. Let’s look at why.
First, what are we talking about here? Term life insurance is the simplest form of life insurance out there. You simply pick a coverage amount (the payout), a term (length of time you’re covered), and pay your premiums every month.
For example, you might pick a $250,000 payout and be covered for 20 years.
If you die during your term, your beneficiaries get the payout — sweet and simple.
Mortgage life insurance is tied to your mortgage. You buy it from your mortgage lender, usually when you’re initially taking out your loan. The premiums can be rolled into your mortgage payments so you don’t have to worry about a separate payment each month.
The insurance is specifically to pay off your mortgage in the event of your death. This means the coverage amount literally depends on the size of your mortgage. Yes, that also means that the payout goes down as you pay down your mortgage, though your premiums do not. Additionally, the money goes straight to your lender, your family never sees it, although they get the benefit of owning their home outright.
Term life insurance makes more sense for most people. Let’s look at a few reasons why — starting with the most important one.
Mortgage insurance only covers your mortgage. In other words, as your mortgage balance shrinks over the years, so does your payout. You would think, then, that mortgage insurance premiums would be cheaper.
Surprisingly, however, they usually aren’t. For most people, especially young folks in good health, term life insurance is cheaper.
For example, a 35-year-old male in good health would pay about $43.85 a month for a $250,000 30-year mortgage. Alternatively, that same 35-year-old male would pay about $21.19 a month for a 30-year $250,000 term life policy.
Over the course of 30 years, he would pay $15,786 in total for the mortgage life insurance policy (assuming his premiums don’t change). For his 30-year term life policy, he would pay just $7,628. Since his rate is fixed, he knows his premiums won’t change over that period.
Now, here’s the kicker. Let’s say he dies 25 years in. He’ll have paid $13,155 in mortgage life insurance premiums. If he stays current on his mortgage and makes no extra payments his remaining balance will be about $68,953 (depending on the interest rate). That’s what the lending company will get to pay off the mortgage from his mortgage life insurance policy.
However, if he buys term life and dies 25 years later, he’ll have paid $6,357 in premiums. Not only does he pay $6,798 less in premiums, but also his beneficiaries get the whole $250,000. They can easily pay off the mortgage and have plenty of money on which to live comfortably for the next several years.
As if this weren’t enough, let’s look at a few other reasons why term life insurance is better than mortgage life insurance.
If you die with a mortgage insurance policy, the bank gets the money. It’s nice to know that your family will have a place to live, but that may not be the only financial burden they’ll be facing.
At the very least they’ll have unexpected funeral costs to cover and perhaps medical bills or other responsibilities. A term life insurance policy gives them the flexibility to spend the money on their most pressing responsibilities first.
Mortgage insurance is tied to your mortgage. Because of this, if you want to refinance and switch lenders or sell your home and take out a new mortgage, you have to qualify for a new mortgage and new mortgage life insurance policy.
A term life insurance policy goes until the term ends, you die, or you stop making payments. You never have to worry about requalifying or facing a gap in coverage.
As long as you pay your premiums for term life, if something happens to you during the term you chose, your beneficiaries get a payout. It doesn’t matter if your health begins to decline, the payout doesn’t go down and the claim won’t be denied (unless your death happened because of a short list of exclusions like suicide within 2 years of acquiring the policy).
Mortgage life insurance does have age limits, so you can start with a policy tied to your mortgage and age out of it. It is probably not that common but mortgages could be 30 years long these days, in 5-year renewal increments.
Have we convinced you? When you’re in the midst of closing your mortgage, the life insurance they’re offering you can sound like a good idea. After all, it’s only tacking $43.85 onto your $1,266 monthly payment. It doesn’t sound like much.
That is — until you realize what you can get for your money. In the majority of cases, term life insurance is the better choice.
