Shortly after my family and I moved into our first home, I started getting official-looking letters in the mail with phrases such as “protect your home,” “complete and return,” and “urgent action needed.”
At first, I thought a mortgage lender was trying to set up monthly payments or an insurance company was trying to sell me homeowners insurance. The letter contained information about me and my mortgage loan.
As I read through it, though, I realized it was a solicitation to purchase mortgage protection insurance. Here’s why I decided to throw all those offers in the trash bin.
What is mortgage protection insurance?
Mortgage protection insurance is a life insurance policy that pays off your mortgage if you die prematurely. Although it seemed logical for me to get some kind of coverage to pay off my mortgage in the event of my death, mortgage protection insurance wasn’t that coverage.
Mortgage protection insurance is a decreasing term life insurance policy. In other words, the death benefit on the policy is designed to go down over time along with your mortgage balance.
Your monthly premium, on the other hand, stays the same throughout the life of the policy.
In some cases, mortgage protection insurance also can provide coverage if you become disabled. However, this type of policy is less common.
Typically, it isn’t your lender that will offer to sell you mortgage protection insurance. Rather, the lender sells your information to insurance companies that specialize in selling that kind of policy.
Mortgage protection insurance isn’t the same as private mortgage insurance (PMI), which is designed to protect the lender if you default on your payments. PMI typically is required on a conventional mortgage if your down payment is less than 20 percent of the value of the home.
Mortgage protection insurance, on the other hand, is completely optional.
3 reasons you should avoid mortgage protection insurance
If you received a letter in the mail offering mortgage protection insurance, here are a few reasons you should toss it.
1. It’s expensive
For a policy that offers diminishing benefits over time, mortgage protection insurance is surprisingly pricey. For example, according to State Farm in December 2017, a healthy 25-year-old woman living in Illinois would pay as little as $22.45 a month for $100,000 worth of coverage.
However, if the same woman were to buy a 30-year level term insurance policy with $100,000 worth of coverage, she’d pay as little as $16.68 a month, according to Policygenius.
Level term insurance offers a level death benefit for a level monthly premium throughout the life of your chosen term. So, you’re paying less for a death benefit that stays the same throughout the life of your mortgage.
Of course, life insurance prices can vary depending on your age and health, so make sure you run your own numbers before you decide if this is the best option for you.
2. Your mortgage is just one piece of the puzzle
If you purchase a mortgage protection insurance policy, you might think you’re in the clear. But there are several other reasons you need life insurance, especially if you have children.
According to LIMRA, a research and consulting firm, the top three reasons people buy life insurance are to:
- Cover burial and other final expenses
- Help replace lost income of a wage earner
- Transfer wealth or leave an inheritance
Instead of buying separate life insurance policies for your mortgage and other needs, keep it simple and get one policy to cover everything.
3. The lender is your beneficiary
With a conventional term insurance policy, your beneficiaries are typically loved ones who get to decide what to do with the money. With mortgage protection insurance, however, the lender is typically the beneficiary, and it uses the money to pay off the debt. There’s no flexibility whatsoever.
That means your family doesn’t have the option to use the coverage to pay for funeral costs or replace your lost income.
Why you might consider buying mortgage protection insurance
Mortgage protection insurance is often “guaranteed acceptance,” which means you don’t have to take a medical exam and won’t be denied for having a shaky health profile.
If you have major health problems and can’t qualify for a normal term life insurance policy, mortgage protection insurance might be worth considering.
If you’re in this situation, consider the cost of a mortgage protection insurance policy versus the cost of your family losing the home if you die. The potential risk likely will be too great to take on without some sort of mortgage protection insurance.
Consider life insurance as an alternative
Fortunately, I didn’t need to buy more life insurance to cover our mortgage because I’d purchased a big enough policy when I was young and healthy.
But if you’re a new homeowner and don’t have life insurance, now is a good time to get some.
The best alternative is a simple level term life insurance policy, which offers consistent premiums throughout the life of the policy and no decreases in your coverage.
That means your family members will get more value and the flexibility to use the funds how they see fit. If they want to pay off the mortgage in full, they can. If they want to make monthly payments and use some of the cash for other needs, they can do that instead.
Although mortgage protection insurance letters create a sense of urgency, take a step back and consider the big picture before signing up for a policy. Shop around and compare insurance rates from several life insurance companies.
Also consider what else you want your life insurance policy to cover in case something bad happens to you. By taking into account your whole financial plan, you’ll know exactly what kind of policy you need to buy so your family has the protection it needs.
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