Because your home will likely be the greatest investment you make in your life, it’s important that you properly protect your purchase from all worst-case scenarios.
Whether it is a natural disaster, theft or untimely death, the road of life has many unexpected turns that can potentially upend you and your family’s financial security.
This is why there are so many different types of insurance available, and although each product does have its benefits, some forms of insurance are more useful than others.
Why mortgage life insurance is useless
Life insurance is one type of insurance that was designed to help your family continue to pay for life’s necessities after your death. If you were to pass away without notice, your family would be forced to find a quick replacement for your salary to pay for things like the mortgage, the utility bills, credit card debt, car loans and health insurance. A life insurance policy can provide a payout that is sufficient enough to help pay for these things.
Since one of the largest (and most important) payments you make every month is your mortgage, you should be sure that the type of life insurance you choose to buy will cover those payments for a sufficient amount of time. Otherwise, your family could be forced to sell your home or be threatened with foreclosure.
Although a regular term life insurance policy is perfectly capable of providing your family with enough funds to cover everything from your funeral to your mortgage payments, most mortgage lenders will still try to sell you a mortgage life insurance policy when you go to close on your home loan. This is understandable, because a mortgage life insurance policy is highly beneficial to lenders, who directly receive the payout from the policy.
Why mortgage life insurance isn’t practical
With a mortgage life insurance policy, you will be required to pay a fixed premium in exchange for a payout that is equal to your outstanding mortgage loan amount at the time of your death. Once your death has been confirmed by the insurance company, a check will be written for the remaining mortgage loan amount and sent to your lender.
Although this product will help your family keep a roof over their heads in the event of your death, there are two main negatives to purchasing a mortgage life insurance policy that almost make mortgage life insurance useless for most homeowners.
The first negative is that, unlike a term life insurance policy, the death benefit payout will not be given to your family. Instead, a check is sent directly to your mortgage lender. Although your mortgage will be paid off, this greatly decreases your family’s financial flexibility.
Sometimes, it is better to allocate a death benefit to more than one thing, especially if you hold a lot of debt at an interest rate this is much higher than your home loan. With a mortgage life insurance policy, your family will not have the freedom to use the payout as they deem best, and this can be dire if you pass away at a time when the money could be better put to use elsewhere.
The second negative is that, although you pay a fixed premium over time with a mortgage life insurance policy, you do not receive a fixed payout. Instead, your payout will be exactly equal to your outstanding loan amount at the time of your death.
This is a huge negative that is known as a decreasing benefit. You continue to pay the same premium cost every year, even though the benefit amount decreases every month you make a mortgage payment.
Why do some people opt for mortgage life insurance?
After reading this, you may be wondering why anyone would ever elect for mortgage life insurance over regular term life insurance. Believe it or not, there is one benefit to this insurance product; it does not require a health screening.
Those homeowners who cannot qualify for regular term life insurance due to poor health are automatically eligible for mortgage life insurance, no matter what their health history looks like.
However, if you qualify for term life insurance, you should always choose it over mortgage life insurance. Although your premium costs will increase as you age, your death benefit payout is a fixed amount that is great enough to cover a wide range of life necessities, including your funeral costs, mortgage payments, family health insurance premiums and other bills.
It is also true that term life insurance premiums are usually less expensive than mortgage life insurance payments, making the mortgage life insurance product even more impractical for families.
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