When you’re finishing up your mortgage paperwork, you’ll often be offered mortgage life insurance. Sometimes, you’ll even have to fill out extra forms if you decide you don’t want it. This focus on mortgage insurance is because it protects the lender by making sure your loan is paid off if you die. Basically, mortgage insurance will pay off your entire mortgage if you pass away. While this can be helpful in some situations, most people find that regular term life insurance offers similar protection for less money.
Why Is Mortgage Life Insurance More Expensive?
At first, the premiums for mortgage life insurance might look similar to those for term life insurance. However, over time, while your mortgage insurance premium stays the same, the payout amount decreases. This setup allows mortgage life insurance companies to keep their rates close to term life insurance rates without requiring a medical exam. But this means you’re getting less value for your money compared to term life insurance. Since mortgage insurance directly covers your mortgage, the payout decreases as you make mortgage payments.
Term Life Insurance Offers More Flexibility
Besides cost, another big difference between term life insurance and mortgage life insurance is control over the benefits. With mortgage insurance, the insurer directly pays the bank holding the mortgage, which means your family won’t have to worry about mortgage payments if something happens to you. But if your family doesn’t want to keep the house, this insurance isn’t very helpful because they’d have to sell the house to benefit financially. On the other hand, beneficiaries of term life insurance can spend the payout however they want.
When Is Mortgage Life Insurance a Better Choice?
Mortgage life insurance might be more suitable if you’re not healthy enough to qualify for regular term life insurance. This kind of insurance doesn’t require a physical or blood test, so it can be more affordable for those with health issues. If you can’t get traditional term life insurance, mortgage life insurance can offer some financial protection for your loved ones.
However, if you qualify for a term life policy, you’ll usually get a higher payout for a lower cost. The benefits from term life policies go directly to the people you’ve named, and they can use the money as they see fit. Typically, term life insurance makes more financial sense than mortgage life insurance, both for you and your dependents.
That said, you shouldn’t rush to buy a term life insurance policy equal to your mortgage’s value without thinking it through. Your decision will depend on your unique circumstances. For example, ask yourself if you could keep paying the mortgage if your spouse passed away or vice versa. If the answer is no, then you might want to consider getting a life insurance policy. But if either of you could handle the mortgage payments on your own and you have little debt, you might not need life insurance at all.