Should you Buy Mortgage Life Insurance or Kick it to the Curb?
One of the relatively newer insurance products to hit the market is “mortgage life insurance”.
If you’ve bought a home in the past few years, you’ve probably been offered the opportunity to purchase a policy.
And if you’ve feared the consequences of your sugar daddy or mama keeling over (or you’re the sugar daddy or sugar mama and have concern for others), the offer may have caught your attention.
In this post, I’ll cover what mortgage insurance is, how it compares to PMI, and if you should purchase it or kick it to the curb.
What is Mortgage Life Insurance?
The prospect of having a home mortgage exceeding a few hundred thousand dollars can be an understandable source of fear to someone who is reliant on another to pay for that mortgage.
Home mortgage insurance is marketed as a means to mitigate that fear. In the even that a home mortgage insurance policy holder were to die, the remaining balance on their mortgage would be paid through the policy.
In rare cases, mortgage life insurance will also cover the policyholder prior to death, if an extreme accident or terminal illness were to arise.
Mortgage Life Insurance Vs. Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is very different from mortgage life insurance, even though you are responsible for paying the premiums on both.
PMI covers your lender, not you, in the event you default on your mortgage. It is also sometimes referred to as “lender’s mortgage insurance”, or LMI, but that is too revealing to the mortgage holder (as it is a complete ripoff that you are paying to cover your lender’s ass).
PMI can be avoided altogether (and you should make every effort to do so) by paying down a minimum of 20% of the price of the home when you take out the mortgage. If you can’t do that, PMI is not a choice. You either have to pay it or get a second piggyback loan.
Mortgage life insurance, on the other hand, is completely optional. It is supposed to protect you and your loved ones and not the bank. Ironically, it does ultimately protect the bank anyways as they wouldn’t have to foreclose and take ownership of the home in the event of a death.
Does Mortgage Life Insurance Make Sense?
Mortgage insurance is not a necessity. Not close to it.
In fact, it’s a bad idea for most people. Here’s 3 reasons why:
1. Its Value Declines with Time
Unlike life insurance policies, the value of a mortgage life insurance policy declines over time. You still pay the same monthly amount, however, since you are paying down your mortgage balance each month, the value you or a loved one would receive from the policyholder’s death would only be the remaining balance of the mortgage. As time goes on and the remaining balance declines, the benefit in the event of death would also decline.
2. It Can Only be Used on a Mortgage
Mortgage life insurance has a singular purpose: to pay for your mortgage if the policyholder dies. For that reason, it is not as flexible as term life insurance, which pays your benefactor so that they may do whatever makes the most sense financially at that time.
It won’t always make the most sense to use an insurance windfall to pay off a mortgage. For example, if a benefactor has credit card debt they are paying 15% on while their home mortgage interest rate is only 3%, it would make the most sense to pay off the highest interest debt first while continuing to make mortgage payments.
3. It is Usually More Expensive than Term Life Insurance
Unless you have a pre-existing medical condition, term life insurance in your twenties and thirties (when most folks venture into home ownership) is extremely cheap. It is possible to get $250,000 in coverage for $10-15 per month.
Mortgage life insurance tends to be more expensive – around $70-$100 for the same amount of coverage. Plus, it declines with time!
Does it Ever Make Sense to Buy Mortgage Life Insurance?
The only situation I can think of where it might make sense to pay for mortgage life insurance would result from a serious pre-existing medical condition that resulted in extremely high term life insurance premiums or an inability to get a life insurance policy at all.
Home mortgage insurance policies are easier to apply for and usually do not involve a medical background check. However, you must read all fine print to make sure that there isn’t language that disqualifies you from receiving benefit if there is a known pre-existing condition.
PMI and mortgage life insurance should be avoided at all costs otherwise, because term life insurance is cheaper, more flexible, and doesn’t decrease over time.
Mortgage life insurance seems like an insurance product devised by banks to take advantage fear and unfamiliarity with the benefits of term life insurance, more than anything else.