Insurance You Don't (Usually) Need: Mortgage Life Insurance

Now, don't shoot me... I don't think this insurance is a rip-off per se, but I do think you can do better in terms of cost for the benefit paid out. But there are exceptions, and you could be one of them.

Most mortgage life insurance will pay out on the death of any party named on the mortgage. So, it will pay out if either you or your spouse dies, for instance. For this benefit, you will usually pay a monthly premium for the insurance as part of your monthly mortgage payment. (If you pay your mortgage more frequently than once monthly, your insurance premium will usually be prorated to your payment frequency.)

If the amount of your mortgage drops, does your payment drop? No. The payment will stay the same for the life of the mortgage, until you renegotiate. So, if you've got a five year term for your mortgage, the mortgage life insurance payment will stay the same for the entire 5 years, despite the declining balance.

Now, if both you and your spouse die, do you get twice the benefit? No. The insurance pays once, whether one of you dies or both of you die.

Is it a bargain to buy insurance from your lender? Generally no. In the vast majority of cases (and I've yet to see an exception), you will pay a much higher premium for the same dollar benefit than if you bought a similar amount of term life insurance. In my own case, for a mortgage of just over $100,000 our lender offered us insurance with a premium of over $20 a month! That would be $250 a year, and was much more than comparable term life insurance for either of us.

Having said that, it's still possible that, depending on your situation, mortgage life insurance could be a better choice for you. Before you decide that, you'll have to review your needs carefully and cost compare with other insurance options. Do you need life insurance on both of you separately? You don't always need both people to have their own coverage. For instance, if an older couple only really needs insurance to cover a mortgage because they are otherwise debt free and the kids are on their own, mortgage life insurance through your lender could be a good deal!  You pay one premium instead of two, and the one premium is likely less than the cost of two individual policies. 

Also, if you have the insurance on the mortgage, it means that the mortgage gets paid off immediately, without having to wait for an estate to go through probate or a will to be contested. This can be a really helpful thing for a spouse who cannot afford the mortgage payment alone.

Things to think about. But don't buy this insurance without thinking and being sure it's the right coverage for you.

Monique L. Attinger

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