Why You Don’t Need Mortgage Life Insurance

So you've closed on your mortgage. Congratulations! You're now a homeowner. This is one of the biggest investments you'll make in your life. And because of the time and money you've invested, it's also one of the most important steps you'll take in your lifetime. As such, you'll want to make sure that your dependents are covered in case you die before you pay off your mortgage. One option you have available to you is mortgage life insurance. But do you really need this product? Keep reading to find out more about mortgage life insurance and why it may be an unnecessary expense.

What Is Mortgage Life Insurance?

Mortgage life insurance is a special type of insurance policy offered by banks that are affiliated with lenders and by independent insurance companies. But it's not like other life insurance policies. Rather than paying out a death benefit to your beneficiaries after you die as traditional life insurance does, mortgage life insurance only pays off a mortgage when the borrower dies as long as the loan still exists. This is a big benefit to your heirs if you die and leave behind a balance on your mortgage. But if there's no mortgage, there's no payoff.

One thing to keep in mind: don't confuse mortgage life insurance with mortgage insurance. The latter is private insurance that must be taken out as a condition of some conventional mortgages. While mortgage life insurance can protect you—the borrower—and their heirs, mortgage insurance protects the lender if the mortgagor isn't able to fulfill their financial obligations. Premiums are either paid separately or are rolled into the borrower's regular monthly mortgage payment.

Once you've closed on your loan, be on the lookout for regular mailouts and phone calls trying to sell you a mortgage life insurance policy. These solicitations are often disguised as official requests from mortgage lenders. Documents often lead with alarming headers like:

• IMPORTANT NOTICE! PLEASE COMPLETE AND RETURN!
• FINAL NOTICE! MORTGAGE PROTECTION CARD!
• NOTICE OF OFFERING! MORTGAGE FREE HOME PROTECTION!

These declarations are often followed by scare tactic statements such as, “If you died tomorrow, would your family be able to continue paying the mortgage and maintain their qualities of life?”

Types of Mortgage Life Insurance

Mortgage life insurance policies—also called mortgage protection life insurance or mortgage protection insurance policies—come in two basic forms. The first one is a declining payout policy, where the policy size decreases proportionally as the mortgage loan drops. Therefore, the closer it is to zero, the payout drops, too. The other type of mortgage life insurance is called level term insurance. With this kind of policy, the payout doesn't decrease.

Mortgage Life Insurance Benefits

Mortgage life insurance may benefit people who don't qualify for term life insurance because of poor health since this kind of policy is typically sold without underwriting. But like any other policy, candidates should seek quotes from several companies and check each firm's financial strength rating with AM Best, a rating company that ranks insurers with letter grades.

Those who want to avoid declining-payout policies should opt for no-medical-exam term policies with level premiums and level death benefits. Although these policies cost more and may offer lower coverage than term policies that review medical histories and conduct physical exams, at least they’ll pay the same benefit, whether you die 10 or 25 years into your mortgage.

Another possibility is to acquire a policy that offers more coverage for a cheaper price earlier in your mortgage term. Once you’ve paid down the principal significantly, consider switching to a guaranteed issue term policy.

Some policies may return your premiums if you never file a claim after you pay off your mortgage. However, the premiums returned to you will likely be worth far less, as inflation erodes their value. Plus, you will have likely squandered the chance to invest any money you would have saved, had you purchased cheaper term life insurance.

The Truth About Mortgage Life Insurance

In truth, mortgage protection life insurance policies are generally ill-advised. First of all, there's no flexibility. Unlike regular term life insurance, where beneficiaries may use insurance payouts as they see fit, most insurers send benefit payments directly to lenders, so your beneficiaries never see any money.

Secondly, expect to pay high premiums. If you’re a healthy individual who has never smoked tobacco, these policies are usually more expensive than regular life insurance. Traditional life insurance may be a better option for you.

There's also a very good chance you won't find much transparency. Unlike other types of insurance, it’s difficult to obtain quotes for mortgage life insurance online, which is a major concern since prices can vary widely.

Finally, expect your premiums to fluctuate. Unlike term policies, which charge fixed premiums for 30 years with no surprise price increases, premiums on mortgage life insurance policies may only be fixed for the first five years, after which time they could spike at any time.

Dwindling Payouts

Some companies offer policies that charge fixed insurance premiums for its duration. But in many cases, the payout on these policies may shrink over time as potential payouts decrease. This type of mortgage life insurance—which is sometimes referred to as decreasing term insurance—is designed to pay off your mortgage balance, while each month your beneficiary pays down part of your mortgage principal. Consequently, the policy’s potential payout shrinks with every mortgage payment.

On the other hand, some newer products have a feature known as a level death benefit where payouts don’t decline. For example, if you're covering a $100,000 mortgage, your beneficiary—not the lender—receives the whole $100,000, even if the mortgage debt drops to $65,000. And if you pay off the mortgage while the policy is still in effect, some policies allow you to convert your mortgage insurance into a life insurance policy.

Age Limits

As with other types of life insurance, mortgage life insurance may not be available after a certain age. Some insurers offer 30-year mortgage life insurance to applicants who are 45 or younger, and only offer 15-year policies to those 60 or younger.

The Bottom Line

Mortgage life insurance purveyors preach the importance of adding their product to existing life insurance coverage, by convincing you that payouts will be eaten up by mortgage payments, leaving your loved ones in the financial lurch. But a better remedy is to simply buy more life insurance.

Those concerned about leaving behind expensive mortgages to their loved ones should consider term life insurance, which is a typically superior solution to mortgage protection life insurance. New York Life, one of the best life insurance companies, offers flexible term life insurance policies.