Companies marketing mortgage life insurance sing on the fact that your home is one of your most important investments and that you protect this prized possession. Understandably, you want to ensure that your loved ones are not pushed out of their family home as a result of your passing but before you jump at what sounds like a great offer, ensure you have done your research and understand what you are really being offered.
Mortgage life insurance is a type of insurance that pays the balance on your mortgage upon your death. Some companies also make payments or waive premiums in the event you become disabled or diagnosed with a terminal illness.
Initially, the insurance policy covers the amount outstanding on the mortgage so in the event of your death or you become disabled the company will be able to make a payment of the capital outstanding to the mortgage company. The termination date of your mortgage life insurance policy is the same date as the final instalment for your mortgage payment. The death benefit, like your mortgage, decreases over the life of the policy because the insurance company calculates the amount of payments you will make to your mortgage company annually and reduces the benefit accordingly. The catch however, is that your premiums do not decrease with the life of the policy. Consequently, mortgage life insurance policies are highly criticized and not often recommended.
Policies designed for specific events are often not suitable for most people. It is very likely your family relies on your income for contributions to the mortgage payment but your family also relies on your income to meet numerous other financial commitments. As a result, for most people, the best solution would be to assess the likely needs of your family after you die and purchase a general life insurance policy with enough coverage to meet these needs. Where it may be convenient is where you suffer health conditions and are likely to pay higher premiums with general life insurance policies which require medical examinations.
Mortgage life insurance is also not suited for people whose spouse may decide to downsize and get a smaller place upon their death. In other situations, the surviving spouse is able to make the mortgage payments and would much rather being able to use the lump sum for something more pressing.
This is not merely a dismissal of mortgage life insurance as there are occasions in which it may be beneficial. For example, mortgage life insurance rates are very reasonable for those with pre-existing conditions who might not otherwise qualify for traditional insurance.
However, err on the side of caution and ensure that you look at the entire picture when deciding on the form of insurance most suitable for your family’s needs.