If you pass away, will your loved ones be able to stay in your home and keep up with the mortgage payments? This is a big concern for many people whose income is essential to paying their family’s mortgage.
If you’re worried about your family being unable to pay the housing bill if something happens to you, you may be considering mortgage protection insurance. Mortgage protection insurance is a special kind of insurance policy designed to pay off your mortgage with the mortgage company if you die before the loan is paid in full. It’s different from something like homeowners insurance. It can be described somewhat like a mortgage life insurance policy.
Typically, when you pass on, the insurer pays off the remaining mortgage balance directly to your lender as a lump sum. Your family gets a paid-off home and doesn’t have to worry about being forced out into the cold once you’re no longer there to help cover mortgage costs.
While mortgage protection insurance products may seem like a good purchase to ensure your family can stay put if you pass away, it’s actually a bad buy in most cases. While all types of insurance plans have pros and cons, mortgage protection insurance can be a particular bad bargain because it’s less flexible than a typical term life policy while also costing more in most cases.
What Is Mortgage Protection Insurance?
Mortgage protection insurance is a life insurance policy you buy specifically to pay off your mortgage if something happens to you. That way, your beneficiaries will be able to continue to live in your home if you pass away without having to worry about paying back a loan.
When you apply for a mortgage protection insurance policy, you’re given a price based on factors affecting the likelihood you’ll pass away while the policy is in effect. This includes your age, your gender, and your current health status. If you sign up for the policy, you’ll pay monthly premiums in exchange for coverage. Typically, your mortgage lender will be the beneficiary on the insurance policy and will receive a payout when you die.
With most mortgage insurance policies, the payout generally decreases to match the remaining balance on your mortgage loan. That means the value of the policy goes down over time, even though your premiums typically stay the same. When you buy a term life policy, on the other hand, your death benefit stays the same for the entire time the policy is in effect unless you make changes to your coverage.
Your mortgage protection insurance policy will typically remain in effect only for the life of your mortgage loan, for example, a 30-year term, while you can choose the coverage period you want for most term life policies. And, some insurers cap the number of years your mortgage protection insurance policy covers, especially if you’re older when you get a mortgage. For example, if you’re over 45 and take out a 30-year mortgage, your policy may limit coverage to just 15 years.
Mortgage protection insurance typically makes sense only if your heirs will want to continue living in your home when you pass away. It also makes sense to buy only if your remaining mortgage balance is high. If your heirs would sell the home anyway or if there’s very little of your term length left, there’s no use in having a policy to repay the loan.
Pros of Mortgage Protection Insurance
There are a few benefits to buying mortgage protection insurance.
One big benefit is you may not need to go through an underwriting process to get approved. Underwriting determines eligibility and rates for most term life policies, which means your age and health status, as well as a complete medical exam, determine both if you can get covered and how much you’ll pay. Some insurers offer mortgage protection insurance without underwriting, so you won’t have to worry that you won’t get approved, and of course, there is no medical exam.
Another big—and obvious—benefit is that your family can stay in your home without having to pay a loan if you die. The coverage amount is matched to your mortgage so you can make certain there’s enough to repay all you owe. Not having to worry about this financial burden is a major advantage for surviving family members, especially if you were the primary breadwinner.
Cons of Mortgage Protection Insurance
For most people, the cons of mortgage protection insurance significantly outweigh the pros.
First and foremost, mortgage protection insurance is often inferior to a term life insurance policy. It can be more expensive for the coverage you get, and the death benefit continually decreases in value.
With a term life policy, you can buy a set amount of coverage—often far more than just the amount needed to pay off your mortgage—and can choose how long you want the policy to stay in effect. Your family can be designated as the beneficiary of term insurance, not your mortgage lender, and your beneficiary can do anything they want with the money, including paying off your house.
It’s also important to remember that a mortgage isn’t the only cost of keeping a home. There’s also property taxes and insurance that are in addition to monthly payments, which can cost many thousands of dollars. If your family can’t afford to pay these costs, they’d have to sell the home even if the mortgage was paid in full. With a term life policy, you can get a larger death benefit so there’s money to both pay the mortgage and cover these other expenses.
Plus, with mortgage protection insurance, the payoff on the policy isn’t guaranteed. If you pay off the mortgage before you die, you have nothing to show for paying your premiums for all those years.
Unless you’re unable to qualify for a term life policy and want to make sure your family can definitely stay in your home, you should usually pass up mortgage protection insurance, as your money may be better spent elsewhere than mortgage protection life insurance.
Consider All Your Options Before Buying Mortgage Protection Insurance
Buying insurance is a responsible thing to do to make sure your family members are provided for. You should explore all of your options, including mortgage protection insurance, and discuss them with your loved ones to decide what’s best for you. Consider your loan amount and insurance quotes, and read all fine print before making any decisions as well.