Congratulations, you just closed on your new home!
As if the hassle of moving and getting settled in are not stressful enough, now you’re receiving postcards in the mail saying “Final Notice: Mortgage Protection Card.”
Whether you’re a dual income family or you have one financial provider, you begin to wonder how your family would continue paying your mortgage if the unexpected were to occur…as if you didn’t feel pressured enough by the new mortgage, now you are receiving notices in the mail asking you to purchase mortgage life insurance.
So what type of coverage is the best to buy in your situation?
Is purchasing a policy through the mail your best option?
Odds are, a term life insurance policy will provide much more “bang for your buck”….covering more causes of death, and at a lower cost than a specialty policy designed to protect your mortgage only.
What would make a term life policy a better option? Let’s compare Mortgage Insurance vs. Term Life to see which is best for you.
Quick Article Guide
A very important question – what’s the cost? To answer that, we first have to know: how long is your mortgage?
Most mortgages are 30 years or less. A typical 30-year term life insurance policy for a healthy, non-smoking, 40-year-old male usually costs about 40% less than a 30-year mortgage life policy would. In fact, a 20-year level term life insurance policy is even lower in cost….about 50% less! 20 year policies are a very popular choice, as it’s the time when people are the most financially vulnerable.
In addition, rates for level term policies are fixed and do not change. Most mortgage policies have rates which increase every five years.
Next question: does your mortgage policy decrease in coverage?
During the life of a mortgage policy, the face value of the policy, or death benefit, decreases to reflect the balance of your loan. In other words, as you pay down the balance of your mortgage, the amount of insurance you have decreases as well. For most of our clients, paying the same cost or more each month for a lower death benefit doesn’t make sense when there are plenty of fixed death benefit policy options available.
The majority of term life insurance products provide this “level death benefit, level cost” feature. Should a death occur,the additional money is often used to cover final expenses, medical bills, pay future property taxes, or to leave money behind for loved ones; the choice is yours.
Should you choose, some term life insurers allow you to reduce the death benefit once within the life of the policy, if you decide you’re “over insured” when your mortgage is reduced. With the lower death benefit, there’s a lower cost for insurance premiums.
Do you have other debts and obligations do you have besides your mortgage?
With term life insurance, you choose the beneficiaries (you can have more than one) and they have the flexibility to use a policy benefit as they like or your trust dictates.
In other words, the death benefit from term life insurance is flexible.
With a mortgage policy, your lender is your life insurance beneficiary.
The policy only pays the outstanding balance on your home. Mortgage insurance policies are designed to protect the financial interests of your money lender.
Many are conditioned that “paying off the house” is the most important thing to do with life insurance proceeds. In reality, it may be better to invest the proceeds, using a portion to continue paying the mortgage and taxes as you’ve done in the past. With a death, some choose to relocate or downsize. It’s good to have flexibility and time to make logical, well though out decisions.
Also consider the average funeral cost is now well over $7,000, and there are commonly considerable credit card and medical bills left to the surviving family. Banks and hospitals don’t forgive them if they can’t save you.
You may be wondering: “What if I move or sell my house?”
Most people who purchase mortgage insurance are shocked to learn that their policy will be terminated if they move to a new home or pay off their mortgage.
A term life insurance does not have these exclusions; a term life policy will continue coverage until you decide to cancel the policy, stop paying your premiums, or your policy term ends.
Curious if your mortgage policy has exclusions? Unfortunately, there may be large holes in your mortgage life insurance policy.
Mortgage policies can have a lot of exclusions. For instance, your family may only receive the benefits if you die in an accident. Believe it or not, the majority of mortgage policies only pay for an accidental death, and this accounts for less than 2% of all deaths in the United States. In other words, this policy will not protect your family if you pass away from cancer, a heart attack, a stroke, or ANYTHING related to your health.
Be sure to read your application and policy carefully. If you’re not asked health information, you’re very likely buying overpriced accidental death coverage. Be sure to determine if your life insurance will pay if there’s a death for any reason.
With standard term life insurance, as long as you’re honest on your application, you policy will pay if you die for any reason other than by suicide in the first two years of coverage.
While it seems that we’ve painted term life insurance in a much better light, a mortgage policy may be a better fit for you if you’re in extremely poor health, or if you have been declined for term life insurance due to serious health conditions. In addition, a mortgage insurance policy may be less expensive if you smoke cigarettes and you do not plan to quit.
The majority of mortgage policies do not require a medical exam and the underwriting guidelines are a generally more lenient. Again, ask the insurer (not your lender) about your policy exclusions (reasons they wouldn’t pay).
If you have already been declined for a term life policy, collect disability due to mental issues, have been treated for substance or alcohol abuse, live in nursing home or assisted living facility, or have a serious health conditions, mortgage insurance may be the best and only way to carry some level of life insurance if you can’t secure it through an employer.
With a few questions about your health and lifestyle, we will be able to shop over 60 top-rated life insurance companies to find the company that will provide you with the lowest rates in the nation.
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