YOUR ASSETS -
Owning a home means having a little piece of the world that is completely your own — where you can have countless get-togethers, adopt a pet and raise your family. Your home is also a cornerstone of your family’s financial future because it’s a substantial asset that’s likely to grow in value. But even the best-made plans are not certain, so homeowners need a way to protect their mortgage from falling to their partner or a co-signer if they are no longer around. This is why you need life insurance to protect your mortgage. The second I closed on my home, I received a letter in the mail every day warning me that I needed to buy mortgage life insurance. As someone who works in the life insurance industry, even I had moments where I wondered if I was throwing away an important piece of mail. (But also, any envelope featuring red, all caps text unnerves me.)Mortgage life insurance, sometimes called mortgage protection insurance, is very different from term life insurance, so it’s important you understand what kind of coverage is being offered to you and what you actually need. Here, we’ll help you understand the pros and cons of mortgage protection insurance, how mortgage life insurance works, how it differs from term life insurance and, most importantly, how you can keep one of your most costly assets from becoming a financial burden.
Until it’s paid off, there’s plenty of financial risk built into your mortgage. If you can’t make the monthly payments, for example, your bank could sell your property to cover its losses. That’s why many homeowners enter a mortgage with someone else — like a spouse, partner or even a co-signing parent. Often, this person is helping limit the financial risk of buying a home. But, what happens if you were to pass away unexpectedly? Your co-signer could end up facing that financial responsibility of a mortgage alone. If that happened, it could undermine the stability you have worked so hard to provide. That’s why having some type of insurance coverage in place is so important — it helps provide a financial cushion to your beneficiaries if you were to die. There are significant differences between a term life insurance policy and a mortgage life insurance policy, and you should understand what type of insurance coverage is a better fit for you before you buy a policy.
Key takeaway: Life insurance helps provide a financial cushion to your loved ones if you were to die
When you buy term life insurance, you get to choose a coverage amount and term length that meets the needs of your family. If mortgage protection is your primary goal, choose a coverage amount that would pay off your mortgage and a term length that’s at least as long as the life of your home loan. But for most families, there’s more financial protection needed than merely an amount that covers your mortgage payment. You should consider income replacement for both spouses, day-to-day bills, and the cost of childcare and your children’s education… to name a few of our many financial responsibilities. Flexibility is one of the significant benefits of a traditional life insurance policy. You can purchase coverage that not only helps protect your family from needing to pay off a mortgage without you but can also help ease the financial burden of day-to-day life. Another key benefit? Affordability. Medically underwritten term life insurance is usually more affordable than mortgage protection insurance. Not sure how much is needed for “day-to-day” life? No problem. a life insurance calculator can look at your income, family structure and debts to help you determine the right policy for your needs.
Mortgage life insurance (or mortgage protection insurance) is simply life insurance that pays off your outstanding mortgage balance if you die. The mortgage insurance policy is usually purchased when you buy your home, or soon after that, and lasts for the same number of years as your mortgage. Mortgage life insurance is a type of term life insurance. It’s usually sold by insurance agencies affiliated with mortgage lenders and by independent insurance companies that obtain information about your mortgage from public records, which is why you receive so many offers when you buy a home.Terms and conditions vary for mortgage life insurance, but in most cases, if you were to die during the policy term, the lender would receive the payout, and the death benefit is exactly the amount you owe. As you make each monthly payment, your outstanding mortgage balance goes down, the death benefit amount on the mortgage life insurance policy goes down with it. Some insurance companies do offer a level death benefit, meaning the life insurance payout is the same whenever the insured person dies. You’ll want to find out whether the death benefit of a mortgage life insurance policy decreases as the mortgage is paid off, as most policies do, before you consider buying one. Don’t confuse mortgage life insurance with private mortgage insurance (PMI), which you may need to pay for along with your mortgage if you put down less than 20 percent on your home. Here are the advantages and disadvantages of mortgage life insurance:
One of the convenient things about mortgage life insurance (aka mortgage protection insurance) is that it’s easy to get. Anyone can buy a policy and typically no medical exam is required in the underwriting process. This is especially helpful for someone with a pre-existing condition or an illness that either disqualifies them from other types of life insurance or pushes their life insurance rates up to an unaffordable level. If the policy offers affordable premiums, mortgage life insurance also might be a good way to supplement your other life insurance coverage. If you have a policy in place to pay off your mortgage balance, your loved ones can then use the payout from your other life insurance policy toward other expenses. To recap, mortgage life insurance pros:
Do you think you might need mortgage protection insurance?