If you’ve ever purchased a home, then you have undoubtedly received an offer to buy mortgage life insurance. Mortgage life insurance companies scour public records or even affiliate with mortgage companies to sell life insurance. They often craft clever advertising pieces for new homeowners that are so official looking you may even get the impression they are required as part of your mortgage. What you may not realize is that mortgage life insurance is optional and quite different from private mortgage insurance, also known as PMI, which may be required when you purchase your home.
PMI is often required by your lender when you purchase with less than a 20% down payment. This coverage does not protect you, it protects the lender. In the event you default on your loan and the lender isn’t able to re-sell your home for enough money to cover the home’s value, PMI kicks in and helps the lender recoup the cost of your home. It doesn’t necessarily have anything to do with your death.
On the other hand, Mortgage life insurance protects you and/or your family in the event of a death of the insured. It is generally a type of decreasing term life insurance. This means that over time the amount of insurance decreases in proportion to the principal balance on your loan. Therefore, your decreasing term life insurance policy always covers the loan balance on your home. The idea is, that if the insured dies prior to the balance of the mortgage being paid off, then mortgage life insurance pays the remaining loan balance and the survivor(s) own the home free and clear.
This all brings up two interesting questions: First of all, can I shop for mortgage life insurance from various carriers? Secondly, do I really need mortgage life insurance?
You may not realize it, but you can purchase mortgage life insurance from many different carriers. In fact, the advertisement you receive in the mail to buy it may be your worst choice when it comes to value. It pays to shop, and generally, you are looking for a 30 year decreasing term product. Although the standard online term insurance quote site will give an idea of the cost, they generally quote level term rates. With level term, the death benefit stays the same over the term, whereas, with decreasing term, it goes down over time. Therefore, decreasing term is cheaper. To get exact rates on mortgage life insurance, just ask your agent.
The answer to the second question is a resounding, “It depends”. Mortgage life insurance needs to be viewed as part of the overall insurance “package” that protects you and your family. If you don’t have adequate insurance to protect your mortgage, and you want your home to be paid off in the event of a death, then yes, you need it. On the other hand, if you have adequate insurance from work insurance and other sources, or you don’t want your home paid off in the event of a death, then the answer is no. These may sound like fairly obvious answers, but you may be surprised at how many people have not calculated exactly how much life insurance coverage they have, and what it will pay for in the event of a death. If you haven’t done this exercise lately, I strongly urge you to do so sooner than later. Don’t wait until it’s too late… Enjoy life!