Why Buy Mortgage Life Insurance
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UPDATED: Jul 16, 2021
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You can get a life insurance policy with the primary purpose of maintaining mortgage payments should you pass away. Applying for mortgage life insurance is just like applying for any other life policy. You have to go through the application process, select the type of insurance that is right for you, and determine how much you need to purchase in order to cover the cost of your continued mortgage payments. Buying life insurance for a mortgage can be an important part of planning for your family’s future.
TIP: Mortgage Life insurance should not be confused with PMI (private mortgage insurance) which insures the lender if you are putting down less than the required amount on the loan.
Types of Mortgage Life Insurance
When you buy life insurance for mortgage payments, you will need to decide which type is right for you and your family’s home.
- Decreasing Term is term insurance where the death benefit decreases over time. Soon after you take out a mortgage, you usually get something in the mail advertising decreasing term mortgage life insurance from your bank or mortgage holder. This insurance is offered at a level premium, meaning the premium payment stays the same over the life of the policy (usually the term of the mortgage–30 years). The face amount will be the amount of your mortgage. But as the years of the mortgage continues, the face amount decreases…usually in keeping up with your decreasing mortgage balance. At the end of 30 years your term insurance expires. However, if you should die in year 15 of your mortgage, you will have enough death benefit to pay off the mortgage.
- There are some drawbacks to this decreasing term mortgage life insurance. If purchased from the bank or your mortgage holder, the beneficiary is the bank! They are selling this mortgage life insurance to you to insure that their interest in the house (the loan) is paid off. Therefore, the money goes straight to the bank, not your family. There is another drawback! While the level pay premium stays the same through out the term, the death benefit is decreasing. Therefore you are getting less and less coverage for the same premium. Mortgage insurance that you buy through the bank or your mortgage holder is usually not very competitive, so if you choose to buy mortgage life insurance shop for other providers and find the best policy.
- Universal life insurance is a type of permanent life insurance in which premiums buy insurance as well as invest in a savings investment. The cash values portion earns an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level. This added flexibility can be advantageous. Because it has a cash component you can stop making premium payments (or make reduced payments) as long as the cash value supports the premium of the insurance portion. In addition, you can borrow against the policy in the form of a loan. These policies can not only go towards the mortgage payments, but provide an emergency source of funds. You also can name whomever you would like as your beneficiary (instead of it being the bank!). A universal life insurance policy can be costly, however, so be sure to evaluate your needs before you decide to purchase one.
- Joint Term Life Policy is a convenient way to cover two people on one policy and provide a great mortgage protection. It provides a level death benefit for two people for one premium. It allows the owner of the policy to have the ability to name each other as beneficiaries. There are two kinds of Joint Life Policies – first to die and second to die. First to die life insurance policies pays the death benefit only on the first insured to die. Therefore if husband and wife were covered under this type of policy, with a death benefit of $250,000 and the husband dies first, the wife would get the death benefit of $250,000. The policy would then be exhausted. Layering this type of joint policy with other insurance and leaving this policy strictly for paying the mortgage, will allow for complete financial protection. If you are using a joint policy for mortgage life insurance, you do not want to get second to die joint policy. Essential this will leave the family with the burden of a mortgage after the first person dies! Make sure you purchase first to die joint life insurance.
- Return on Premium Mortgage Life Insurance is a term life insurance policy that more and more are choosing for their mortgage protection. It offers a level death benefit for the term of your mortgage. You also have the option to name your beneficiary with this type of protection. Normally, a higher premium than your basic level term policy, it has one major distinction – if you out live the term of the policy, you get the return of your entire premium. This is extremely attractive to a mortgage holder. Not only does this type of term mortgage life insurance cover you for the entire term of your mortgage, but you are able to get back what you spent in premium if you should out live the policy. You can then celebrate your mortgage being paid off with a nice vacation!
- Level Term Insurance is probably the cheaper option for Mortgage Life insurance. Level term can be purchased in incremental terms to match your mortgage. A 20 or 30 year level term offers protection throughout the life of the mortgage at a level death benefit. Simple to obtain, a level term can be economical, allowing a homeowner to stay within their budget. The best part of a mortgage life insurance level term is, while your mortgage is decreasing, the level of the death benefit stays the same, allowing your love ones to have more money in the event of your death to possibly pay off other debts.
Having mortgage life insurance is smart for any homeowner who would like to see their family left with a mortgage free home after their death. Depending on the kind you purchase, it could not only offer protection for the mortgage but also for other debts associated with home ownership years after you are gone such as taxes, repairs and so on. Getting the right kind of mortgage life insurance is important, so in order to determine what kind is best for you and how much you should purchase, take the time to talk with an insurance agent before making a purchase. When you are ready to shop and compare quotes, Free Advice can help. Click here to visit the Free Advice quote center and get started today.
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