For most adults in America, purchasing your first home or finally purchasing your “dream” is usually a life-changing experience. Even though most home buyers must agree to a 15-year or 30-year mound of debt, they know that having a safe and comfortable home in a well-kept neighborhood is the American dream. Let’s face it, for most people their home is their most valuable asset and this is where Mortgage Life Insurance comes into play.
At the risk of dumping cold water on the ultimate celebration, what happens if you pass away? Can your spouse or partner keep up with the mortgage payments or will they be forced to sell and move into a cramped apartment? Does this sound like a risk you’ve thought of?
If so, you should consider purchasing inexpensive mortgage life insurance that will guarantee your surviving loved ones can stay in the family home if you should pass away unexpectedly. Don’t take chances with your home!
What is Mortgage Life Insurance?
Mortgage Life Insurance, also known as mortgage protection insurance, is an affordable and straightforward strategy that allows your beneficiary to pay off your mortgage in the event of your death.
It’s actually quite a simple concept. If you have a 15-year mortgage, you purchase term life insurance with a death benefit sufficient to pay off your mortgage. If you die during the 15-year policy term, your beneficiary can use the death benefit to pay off the home mortgage.
However, if your mortgage is for 30-years, you do the same thing but instead of 15-year term life insurance, you purchase 30-year term life insurance.
If there are two breadwinners in the household and it takes both to make the mortgage payment, then you should consider getting mortgage life insurance on both parties.
Should I use Term Insurance or Permanent Insurance?
In most cases, mortgage life insurance is written using term insurance rather than permanent life insurance because a mortgage loan typically lasts for 15 or 30 years. You certainly can use whole life or universal life insurance, but the premium will be substantially higher, and most consumers prefer to pay as little as possible.
For example, a $250,000 30-year term policy purchased by a 30-year old male would cost about $24 a month but that same amount of coverage using a universal life policy would cost about $103 per month – four times more than the term policy.
Although the universal life policy would build cash value over time, there would likely not be enough to offset the substantial difference in cost. Additionally, if you were to use universal life to cover your spouse, the additional cost would be even greater.
Here are the Most Frequently Asked Questions about Mortgage Life Insurance
Does the coverage go down as my mortgage balance goes down?
This used to be the case. However, mortgage life insurance policies today use a level death benefit because decreasing term insurance costs almost as much and with decreasing term insurance, your premium doesn’t go down as your death benefit goes down. If your mortgage payoff is much lower than the death benefit, your beneficiary can use the available funds any way they please.
Do I have to make the lender the primary beneficiary?
You have that option, but we don’t recommend it. Your beneficiary will receive the death benefit in a lump-sum that is tax-free. He or she can then call the lender for the payoff and forward that money to them. If the death benefit is paid to the lender, it could take weeks for the lender to return the unearned portion of the death benefit back to your surviving loved ones.
Who should I list as my Beneficiary?
Your beneficiary should always be an adult that you trust will carry out your wishes with the death benefit. If you list a minor child, you will have to assign a guardian to accept the insurance proceeds on their behalf.
Always make certain that you speak with your beneficiary before you list them on your policy and be sure to make changes if you decide to leave the death benefit for another individual. It’s also important to list a contingent beneficiary in case your primary beneficiary does not survive you.
Is a medical exam required to get Mortgage Life Insurance?
The underwriting requirements for your mortgage life insurance will depend on the company you decide to purchase from. Some companies do not require a medical exam but others do. Typically, your insurance will cost less if your policy is fully underwritten (includes a medical exam) but not always.
I’ve heard a lot about Return of Premium insurance, what is it?
The return of premium rider is an option you can purchase which provides for the insurance company to return all the premiums you’ve paid on your policy if you are alive at the end of the policy term. Although this rider is considered expensive for older adults, young adults should seriously consider it, especially if they are not committed to saving money for retirement.
For example, a 30-year old homeowner would pay an additional premium of about 60% for the return of premium rider. So, if your premium with the rider was $60 per month, your insurance company would pay you a lump-sum payment of $21,600 if you outlive your 30-year term policy.
You could then use this tax-free payment to invest in your retirement, put in a swimming pool, take an exotic vacation, or any other reason.
What if I become disabled during the term of the policy?
Believe it or not, at 30 or 35 years old, your chances of becoming totally disabled are greater than your chance of passing away. Many insurance companies offer mortgage life insurance will allow you to purchase a disability income rider.
This rider provides for your insurance company to pay you monthly disability payments while you are disabled and unable to work. The amount of the disability benefit depends on the insurance company and is specified in the policy contract.
The Bottom Line
If you are a new homeowner or have bought and sold several homes during your lifetime, certainly you want to provide financial security for your family if the worst thing happens. Leaving your surviving loved ones with a paid-for home means your family can remain in their home and continue on without worrying about the burden of a mortgage payment. It will bring peace of mind for you and for your family.
What are your thoughts mortgage life insurance? Do you think it’s something that could be useful? Let us know in the comments below!
If you are looking for more information about mortgage life insurance options, reach out to us directly to receive a free quote.