Last Updated: 08/03/2018
It’s official – you just bought your first home, and can now proudly call yourself a homeowner.
Unfortunately, with that stepping stone also typically comes a mortgage. You’ve heard of mortgage life insurance before, and want to know if it’s right for you.
This article discusses what mortgage life insurance is and how it is in comparison to term life insurance, to ultimately help you in your decision of which to purchase.
Quick Article Guide:
- Mortgage vs. Term Life Insurance
- Important Considerations
- Who Will Your Beneficiary Be?
- Disadvantages of Mortgage Life Insurance
- Questions? We Can Help!
First thing’s first – what is mortgage life insurance? It’s pretty much just like it sounds: an insurance plan typically offered by your bank/financial institution to insure your new home.
The amount of coverage you’d receive is equivalent to the amount of your loan, so if something were to happen to you, the bank would be your beneficiary and pay off the loan. Usually, a mortgage life insurance policy is a decreasing term, which means the coverage decreases as the years go by, although you still pay the same rates. A medical exam isn’t required for approval, which may be very appealing to those who are in less than average health.
Now let’s talk about term life insurance. It is a temporary life insurance policy that is in force for a certain number of years, such as 10, 15, 20, 25, or 30 years. These policies do not decrease as the years go by, and also have fixed rates throughout the term. Instead of the bank being your beneficiary, you get to choose who your death benefit goes to (like a family member).
Everyone’s situation is unique. Here are some things you should consider when debating whether to buy mortgage or term life insurance:
Like we previously mentioned, mortgage life insurance does not require a medical exam for you to be approved. So if your health isn’t in good condition, have an ongoing substance abuse issue, refuse to go to the doctor, or any other underwriting concern, this may be a better option.
However, if you’re in average or better health, it’d be a much wiser decision to look at term life insurance to cover your mortgage. Taking a medical exam is relatively easy – it’s free, the health practitioner will accommodate you by coming to your home or work (so no need to visit a doctor’s office), and could save you a lot of money, potentially making your premium half the cost of a mortgage life insurance policy.
Even if your health isn’t great, there’s a type of life insurance called “high-risk life insurance,” which we specialize in here at Term Life Advice. It’s best to research all your options before settling for something like mortgage life insurance.
Reasons Mortgage Life Insurance Wouldn’t Pay
Since mortgage life insurance is solely focused on one thing, it comes with its own limitations, known as “exclusions.”
Without requiring a medical exam, this gives the lender reasons why they wouldn’t pay. Many age life insurance policies will only cover accident-related deaths, so it’s important to check with your life insurance agent to see where your policy stands. If it doesn’t cover anything health-related, and you died due to a heart attack, for example, that wouldn’t be good!
If you aren’t in good health and think that you may only qualify for mortgage life insurance, check out Guaranteed Issue life insurance before giving up hope. They accept anyone between the ages of 50 and 80 without requiring a medical exam for approval. It is important to note, however, that they do have a 2-year waiting period before you’re fully covered, which mortgage life insurance does not.
When you purchase mortgage life insurance, your beneficiary is the financial institution (such as your bank) that you purchased the policy from. This makes sense, because if you pass away before paying off your mortgage, they protect themselves from losing money on you.
If you’d like your family to get your death benefit after you die, then term life insurance would be a better choice. Most people have more bills and financial responsibilities than just a mortgage, so getting a term policy that they could use the death benefit towards the mortgage and other bills (such as funeral expenses) would most likely be more helpful.
We’ve already mentioned a few disadvantages above – like the decreasing term while still having fixed rates, only paying for accident-related deaths, and not getting to choose your beneficiary. However, there are a few more that we haven’t mentioned yet.
Say you pay off your home early or decide to move. If you have mortgage life insurance, it will immediately end when you pay off the house. If you have term life insurance, you still have coverage as long as you need it.
If you decide you don’t need it anymore, the cancellation process is very easy – call your agent, tell him or her that you want to cancel your policy, and he/she will provide you the paperwork to do so. Another (easier) option is to simply stop making payments on the policy.
After stopping payments, your policy will go into what is known as a “policy lapse” for 30 days, where you have the chance to renew it. After 30 days, the policy typically cancels automatically. It is important to note, however, if you have auto-pay set up, then this approach won’t work.
Most life insurance companies offer a prorated refund. For example, say you pay semi-annually. If you make the first payment but cancel 2 months in, you may get a refund for 3 of your premiums.
Another issue with mortgage life insurance is bundling. For those who are not familiar, bundling is when you purchase multiple insurance policies through the same provider.
If you decide to bundle your mortgage life insurance into your mortgage, you won’t be able to cancel it later on if you decide you don’t need it anymore.
If you’re intention is to purchase mortgage life insurance because it’s just you and your spouse with no heirs, and just want insurance in case anything happens to the house, that’s one thing. But say your spouse dies before you do, or you decide that you no longer want the insurance for whatever reason. If you choose to bundle, you won’t be allowed to cancel it, and therefore will be stuck paying the premiums. And that would be unfortunate!
Have questions about getting a life insurance policy for your mortgage, or just to protect your assets and heirs? Give us a call!
Term Life Advice is a no-fee brokerage that represents 63 top-rated life insurance companies. By working directly with dozens of companies, we’re able to save our client’s time and money by matching them with the best options available.
Give us a call, toll-free, at 855-906-6494, and one of our licensed agents will be able to provide you with your options and accurate rates in just a few minutes.
If you have some health issues, don’t worry! By having access to each company’s guidelines, we know which companies are more lenient with specific health issues than others. By asking you a few questions about your health will make sure you apply with the best company for your unique health profile.
If you decide to apply for coverage, it’s as simple as answering a few questions over the phone and electronically signing your application through email. Depending on your age, health, and the amount of coverage you apply for, you could be approved in as little as 24 hours.
As an independent, non-partial agency, our only goal is to provide you with the lowest rates and the best customer service in the industry. You can also request a free instant quote below to compare rates from dozens of life insurance companies in less than a minute. We helped thousands of clients with their non-medical life insurance needs, and we can help you too!