Are you in the market for a new home or considering refinancing your current one?
If you recently applied for a mortgage, chances are your mortgage broker or bank has offered you mortgage insurance for your new mortgage.
What exactly is mortgage insurance and is it worth the money?
In this article, we’ll explain how mortgage insurance works and provide you with other more affordable options to help protect your investment.
Quick Article Guide:
1. What Is Mortgage Insurance or Mortgage Life Insurance?
2. Mortgage Life Insurance vs Term Life Insurance
3. Benefits and Advantages of Term Life Insurance
4. Planning to Renovate Your Current Home and Downsize Once Your Kids Are Off to College?
5. Analyzing the Cost and Benefits of Mortgage Life Insurance
6. When Is Mortgage Life Insurance a Good Idea?
7. Save Time and Money Finding the Best Life Insurance Options Available
Mortgage insurance, or mortgage life insurance, is a form of life insurance that is designed to pay off the balance of your mortgage if you pass away before your mortgage is paid off. With mortgage life insurance, your family is not the beneficiary of your insurance policy, your lender is. This type of life insurance is unlike traditional life insurance because if you pass away, the insurance does not pay out to your family, it pays directly to your lender.
Many lenders will require, or at least highly suggest, that you secure your mortgage loan with life insurance. We recommend purchasing life insurance to protect your mortgage as well, but you can save money and your family will receive more coverage by purchasing term life insurance instead of mortgage life insurance. Before being pressured into buying mortgage life insurance by your lender or loan agent, it’s a smart idea to research your options.
In this article, we’ll explain the 3 major differences between term life insurance and mortgage life insurance as well as provide you with some options to save money on the cost of your insurance.
1. The Cost of Coverage Is More Expensive
One of the major differences between term life insurance and mortgage life insurance is that with mortgage insurance, there are minimal health underwriting requirements. Mortgage life insurance policies usually don’t require a medical exam for approval. This is the reason that many mortgage insurance policies only protect the insured if they pass away from an accident. In other words, if you pass away from a health issue like cancer or a heart attack, the insurance policy will not pay out.
If you are able to purchase a mortgage insurance policy that protects your health as well, these policies will be extremely expensive, especially for applicants in average or better health. If an insurance company is unable to assess your health before approving your life insurance policy, they must charge everyone in your age group the same. This means that you’ll be paying the same price for your policy as people who smoke cigarettes or people with serious health issues.
2. Increasing Rates and Decreasing Coverage
Unlike term life insurance with guaranteed rates and coverage, most mortgage life insurance policies only have premiums that are fixed for the first five years of coverage. With mortgage life insurance, the rates usually readjust (increase) every five years. While your rates are increasing, your coverage is actually decreasing. The death benefit offered by your mortgage insurance policy decreases to match the balance you owe on your mortgage. In other words, you pay more to receive less.
With mortgage insurance, there may be “waiting periods” and/or “exclusions” for pre-existing conditions to be covered as well. If you’re able to qualify for low cost level term life insurance, it should provide a better solution for both price and coverage. With term life insurance, you can lock in level rates and coverage for 10, 15, 20, 25, or 30 years depending on your needs and the length of your mortgage.
3. Mortgage Life Insurance Does Not Provide Flexibility
With mortgage life insurance, your lender or your bank is the beneficiary of your life insurance policy. A beneficiary is the person, or lender, who receives the death benefit from your life insurance policy if you pass away while your insurance policy is active. With mortgage life insurance, your surviving family has no control over the proceeds of your life insurance policy. The balance is paid directly to your bank to pay off the mortgage. Once the mortgage is settled, the coverage is exhausted.
With term life insurance, you family is paid directly by the insurance company, tax-free. They are able to use the money they receive as they see fit without restrictions. This allows them the flexibility to pay off the mortgage, or set money aside to pay bills, fund college tuitions, etc. Most term life insurance policies also provide more coverage than the amount of your mortgage because a term life insurance policy does not decrease as the balance of your mortgage does. However, if your need for life insurance decreases, most term life insurance policies will allow you to decrease the amount of coverage you carry. This flexibility allows you to save money on the cost of your insurance if your needs or budget changes.
Some of the benefits of term life insurance are listed below:
• Fixed cost for the life of your policy.
• Death benefit remains consistent (doesn’t decline) over the life of your policy.
• You choose your beneficiary, generally a family member, so money is directly paid to them TAX FREE following your death, rather than to your lender.
• Death benefit could be used for any need…continuing to make mortgage payments, pay off the entire balance, pay other bills, education, or any other purpose.
• It’s easy to cancel the policy with no penalty or obligation if you sell the property or decide it’s no longer needed for any reason.
• You can decrease the amount of coverage you carry if needed.
• Any life insurance coverage that exceeds the balance of your mortgage is still paid to your surviving family members.
Some of the clients we work with intend to sell their homes once their children have grown up and moved out. If you’re not planning to stay in your home, choosing a term life insurance policy that you can control is a safer choice.
Mortgage life insurance, unlike traditional term life insurance, must be repurchased if you move or sell your home. With term life insurance, you can carry the same amount of coverage at a fixed price as long as you need it. You don’t need to repeatedly prove your health as you age and your rates will not increase as you get older.
Let’s say that you have decided to purchase a house for $250,000 and your mortgage is for 15 years. While signing with the bank, you decide to purchase a mortgage life insurance policy.
13 years go by, and your mortgage balance has decreased to roughly $75,000. If you were to die at this time, your mortgage balance will be paid by your policy. However, the life insurance company is only paying out $75,000, even though your original coverage was for $250,000; and even though your coverage has decreased as your mortgage has been paid down, your rates have increased.
If you had purchased a 15-year level death benefit term policy instead, your family would receive a tax-free payment of $250,000, and they would able to spend the funds as needed. In addition, the cost of your term life insurance policy remains fixed and is usually easier to budget for.
In addition, term life insurance is almost always less expensive than mortgage insurance. In most cases, our clients are able to secure a 30-year level term for about half the cost of a mortgage life insurance policy. Keep in mind, the amount of coverage offered by the term life insurance policy does not decrease, and unlike a mortgage life insurance policy, the cost of your coverage does not increase! Why pay more money for less coverage with less flexibility?
You can also extend a term life insurance policy for a longer period of time than your mortgage. If you think you might refinance your loan down the road, no problem… Buy a term policy for 20, 25, or even 30 years!
There’s no cost to apply for term life insurance. You can apply for a policy and get approved before deciding whether or not to accept coverage or make a payment. Depending on your age, you may be able to save money on the cost of your life insurance by completing a free mini-medical exam, especially if you have any serious health issues. Our agents will be able to provide you with pricing for both options. If the medical exam option saves you money, we’ll help you schedule your free exam, which can be performed at your home or business.
The full approval process for term life insurance with a medical exam normally takes 4-6 weeks, so plan accordingly. We recommend starting the shopping process about 3 months before you need the coverage. Once your policy is approved, you’ll be able to fully compare cost and benefits before you accept your policy.
When you receive your approved policy in the mail, you have 30 days to review your policy or adjust the amount of coverage you accept if needed. This period is known as the “free-look” period and it is designed to give you a chance to compare the coverage offered by both policies before making a payment or accepting your policy. After comparing the options, coverage amounts, and cost, our clients always opt for term life insurance instead of the mortgage life insurance that their bank is offering.
If you have extremely serious health issues, are a cigarette smoker, or if you have been declined for life insurance before, mortgage life insurance may be your best option for coverage. But before making this decision, please feel free to give us a call to compare what other options may be available.
Most uninsurable applicants are only eligible for “Guaranteed Approval” life insurance like the policies you’ve seen that are advertised on TV. Typically, these types of policies only offer a maximum of $25,000 in coverage, which is not enough to protect a mortgage. In addition, these policies are extremely expensive for the limited amount of coverage they offer, and they have a “waiting period” of 2 years before you are fully covered. In other words, if you pass away from any health reasons before this 2-year period is up, the policy will not pay out.
BOTTOM LINE: Don’t purchase the mortgage life insurance offered by your lender before you have a chance to compare other options. The policies that are marketed through most lenders and the media are not worth the cost, especially when they are compared to other options available. Shop the market and compare the costs and benefits of each policy before making a final decision.
Our agency specializes with matching our clients with the most affordable life insurance options available. We represent more than 60 top-rated life insurance companies and we’ll make sure we match you with the best companies available, no matter what your health or age is. Our agents have extensive experience with pre-qualifying our clients by phone because we have access to all of the insurance company’s underwriting guidelines.
Best of all, our professional service is provided free of cost. We’re paid by whichever life insurance company YOU choose after we’re able to get you approved for coverage. If you don’t qualify, or decide not to purchase life insurance, no problem. There is no cost or obligation to apply for coverage.
Our goal is help our clients make educated life insurance decisions. We have no quotas or shareholders to answer to. Our clients are always our #1 priority! Give us a call today at: 855-902-6494 or request a free quote online below.