Who Needs Mortgage Life Insurance?

Buying a home involves many financial considerations – insurance is not the least of them.

Lenders typically require buyers to purchase homeowners insurance, and may also require them to insure the loan against default through the purchase of private mortgage insurance. Buyers also receive offers for an optional type of insurance – mortgage life insurance - that guarantees to cover the balance of the mortgage if the homeowner dies before the house is paid off.

Mortgage life insurance provides peace of mind by guaranteeing a mortgage will be paid even in the event on an untimely death. The products are also relatively easy to obtain and may be a good choice for homeowners who have health conditions making it difficult to qualify for traditional term life insurance.

Mortgage life insurance differs from term insurance in key ways. For one, it is a “decreasing” benefit. The payout is equal to the principal balance on the loan, and that principal decreases with monthly payments. Unlike term life policies, which involve fixed payments and a fixed payout, mortgage life insurance involves fixed payments and a decreasing payout. Homeowners who out live their mortgage will receive nothing at all.

The payout for mortgage life insurance goes directly to the lender and the family has no control over how the money is spent. The family receives the benefit of owning the house free-and-clear, but loses the option of using the payout for something more beneficial such as paying off high-interest credit card debt. Beneficiaries receiving a term life settlement can spend the money as they see fit

Mortgage life insurance policies do not cover additional loans or credit lines against the house, so the family may be left with uninsured debt against the house.

“Overall, mortgage life insurance doesn’t seem like a great idea for most people,” according to www.cashmoneylife.com. “For most people, a traditional term life insurance policy is a better option than mortgage protection insurance due to a potentially larger payout, lower premiums, and the flexibility of using your life insurance settlement how and when you want. The most important thing to remember is that you buy enough life insurance to meet all your financial needs.”