Question: What is “mortgage life insurance” and why do I need it when I already have private mortgage insurance?
Answer: Private mortgage insurance and mortgage life insurance are two very different financial products.
Private mortgage insurance is required by lenders when home buyers purchase a home with less than 20 percent down. If the home buyer is unable to pay the mortgage, then the property is foreclosed and sold at auction. The mortgage insurance company pays the lender for some or all of the loss.
Mortgage life insurance is something completely different. While the beneficiary of private mortgage insurance is the lender, the beneficiaries of mortgage life insurance are your heirs.
With a mortgage life insurance policy, you can typically buy coverage for 15 or 30 years. If something happens, the insurance company steps in and pays off the mortgage balance.
As with all insurance policies, there are a number of issues to consider.
First, since the mortgage balance is declining with each payment it follows that the death benefit available from mortgage life insurance is also falling. With some policies, however, there may be a residual coverage amount, say not less than 20 percent of the original loan amount.
Second, because mortgage life insurance is “insurance,” the money paid out by the policy is tax exempt. See a tax professional for details.
Third, you can typically get a rider with mortgage life insurance which allows you to add a second person to the policy. In other words, if the property is owned by two people and one dies, the policy will kick in to pay off the mortgage balance. This will allow a co-homeowner, such as a spouse, to own the property free and clear of any mortgage debt.
Fourth, insurance coverage may not be available for home buyers above a certain age. Alternatively, lenders cannot engage in age discrimination and must make mortgages available to any qualified home buyer regardless of age.
Fifth, you may be able to find a mortgage life insurance policy which has a premium waiver that goes into effect in the event of disability. If you see such clause it will be important to review exactly what it means with an insurance broker. Get your answers in writing.
Sixth, you need to determine who actually gets paid in the event of death. Does the mortgage insurance company step in and directly pay the lender, or does the insurance company write a check for your heirs? This is a matter of personal preference.
In some cases, you may prefer a mortgage–free property while in others you might want your heirs to get the cash if you are certain they can continue to carry the loan.
Seventh, check to see if the premiums are level for the life of the policy. In some cases, you may find that the insurance company can raise the premium. This raises a question: Is there a maximum monthly premium cap?
The question that arises with mortgage life insurance is whether it’s actually the right insurance product for home buyers. It pays out only in the event of death which means you might want to speak with insurance brokers and consider term life insurance policies as an alternative.
For instance, payment upon “death” or only an accidental death, not death from disease or old age. With a life insurance policy, the payout is tax-free but the benefit does not decline over time.
For details and specifics speak with such experts as insurance brokers, tax professionals and fee-only financial planners.