Mortgage life insurance, like all insurances, is about risk management. For each type of insurance, we need to identify the risk to cover, and the best way to do it. Especially, since like other insurance types, it can be expensive. We must understand the the inherent risks are the same as for normal life insurance. Most of all, we must know there are different ways to get insurance.
Mortgage Life Insurance can be Expensive
Financial institutions sell mortgage life insurance to protect them from potential loss on the death of mortgagees. Financial institutions, instead of family members or others you choose, benefit from these policies.
Let’s look more closely at how mortgage life insurance might arise. If you borrowed $100,000 from a bank to buy a house, the bank would write its name on the property’s title. Then, the bank becomes a co-owner up to the loan’s value. This is the typical mortgage.
If you died before you repaid the mortgage, the bank would have two choices. It might sell the house and give your beneficiary the difference between the amount they got on sale and the outstanding loan. Instead, it could allow your beneficiary to take over the mortgage loan and repay it. To do the second, the bank would need to be happy with the beneficiary’s finances after your death. The bank might accept the risk if they felt they would be repaid. Usually, this means your life insurance and other assets gave enough income to pay the outstanding loan balance and give your dependents an acceptable income to live on.
Another way to get coverage when you take out a mortgage is to insure your life for the mortgage’s full value. This would add to existing regular life insurance coverage. However, this does not look at your overall finances. You might not need more insurance. That’s why I think it is important to look at your finances holistically before deciding mortgage life insurance.
Choose “Term” Instead
Mortgage life insurance sold by a financial firms can be expensive and has many snags. First, the insured amount falls as the mortgage balance drops over the mortgage’s life, but the premium does not fall. Second, unlike a term life policy, the bank has the right to hike premiums. Third, it is not portable. So, if you switch your financial institutions, you need to reapply for mortgage life insurance with your new bank.
You would be better off to review your financial affairs and if needed, buy extra term insurance from an insurance company. You would own the policy. The financial institution wouldn’t. Your spouse or others you choose, would be the beneficiary, not the bank. And your spouse or dependent would have the choice to take over the mortgage, if that alternative was best for them.
Like all financial decisions, listen, hear, and understand your alternatives, and let the Lord guide your decision.
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(C) 2011, Michel A. Bell.