Just when you thought you were finishing up the long mortgage application process, the banker informs you that you should buy mortgage protection. It’s a great product label for something Americans have been buying for over a century which is known as Life Insurance. Mortgage protections is usually a decreasing term life insurance policy with the lender listed as a beneficiary rather than your family. If you are wondering whether or not to get this policy? You should continue reading and see for yourself but just in case you’re not a big reader here is a quick summary:
- Mortgage Protection Life Insurance is simply a decreasing benefit term life insurance. However, the monthly payment stays the same although the coverage amount decreases.
- If you pass away the death benefit will go to the lender and not your family like it would with an individual policy.
- Contrary to the popular belief a term life insurance policy is a lot more affordable than a mortgage protection especially when you shop around with an independent agency.
- If you go with an individual term life insurance policy your death benefit and premiums of coverag will stay level.
- Now if you have certain medical conditions a mortgage protection policy can be beneficial because their underwriting is not as strict.
- By going with bank issued mortgage protection life insurance you’re also missing out on additional benefits that come with the individual term policies like terminal illness rider or any other add ons you can purchase.
Should you buy a mortgage protection life insurance policy. Well, let me save you the time and say NO!
Why Not?
Control
With a mortgage protection life insurance policy your death benefits are automatically set up to pay off the lender. Your family will not see a cent or have any say in the process. Paying off a mortgage can be a great help to your family but what if there are more pressing needs than paying off the home. An individual term life insurance policy will allow you to leave a large sum to your family so they can pay off the mortgage balance and leave the rest for any other expenses they may have.
Cost
Typically this coverage is more expensive than a policy you can buy on your own. Especially if you work with an independent broker that will scour the marketplace for the best rate. Hint: we are that broker. In addition to that if your policy is paid through the loan you will end up paying extra charges due to the interest. By shopping the entire marketplace you can get really good term life insurance rates. For instance, here at InsureChance, we work with over 60 top rated life insurers and the rates are actually fixed by the law so it doesn’t cost you anything to save with us. For sample rates, you can read our article on life insurance rates by age.
Benefits
What most people don’t know is that mortgage protection life insurance is a decreasing term policy. This means that as years pass the coverage amount will decrease since your loan is decreasing as well. Doesn’t sound too bad but when the problem is that your monthly payment will remain the same. Since we are discussing benefits it’s also important to read the fine print because some mortgage protection policies only pay out in the event of death caused by an accident. So if you pass due to cancer or any other illness you paid the policy for nothing. Besides, there is no need to buy a decreasing term policy, especially when the premiums are not going to decrease and you can get a policy where the death benefit stays the same. Another thing to consider is that a term life insurance policy can be converted to a whole life or universal life as long as you do it before the term expires or age of 65. This is a great option that individual term life insurance policies have since you can convert regardless of your health. There are also a ton of add ons known as policy riders that can be included with your policy sometimes free of charge or for an additional fee. There is a rider that will give you up to 50% of your life insurance policy up front while you’re ill with a terminal sickness known as accelerated death benefit rider. A ton more are available that can help you make the policy exactly what you need it to be.
Portability
Were you wondering when are we going to stop bashing this policy, well we are almost done. Mortgage protection policy is not transferable, so if you refinance with a different lender expect to have to buy a new policy.
The only reason I would recommend for someone to get a mortgage protection life insurance is if due to poor health they can’t qualify for individual term life insurance. The only benefit these policies have is that they are more lenient with pre-existing conditions than per say an individual policy you buy yourself.
Mortgage Protection Life Insurance Rates
As mentioned before mortgage protection life insurance is nothing but a decreasing term policy that is just labeled. All you have to do is simply buy a level term life insurance plan to reflect your mortgage length which on average a 15 or 30-year term life will do just fine. Here are sample rates for both male and female to give you an idea of what you can expect to pay.
Male $500,000 30 Year Term
Age 30 $33.25/mo with a Preferred Plus Rate Class
Age 40 $53.81/mo with a Preferred Plus Rate Class
Age 50 $134.35/mo with a Preferred Plus Rate Class
Female $500,000 30 Year Term
Age 30 $27.56/mo with a Preferred Plus Rate Class
Age 40 $43.20/mo with a Preferred Plus Rate Class
Age 50 $100.19/mo with a Preferred Plus Rate Class
*Preferred Plus Rate Class is available for individuals with excellent health. If you’re not an excellent risk then the rates can be higher.
When is Mortgage Protection better than Term?
There may be a situation that arises when a mortgage protection policy will be a better option for you. Typically this is due to certain underwriting criteria with an individual policy that you’ll go through and in some cases will get turned down for coverage. If you have medical conditions like type 1 diabetes, heart disease, major depression and maybe some background history like a felony you may not qualify for an individual policy. This is where mortgage protection starts looking like an attractive option since there is very little underwriting going on to get approved for the policy.
Please do exercise caution when dealing with mortgage protection life insurance because sometimes they offer an accidental death life insurance policy. This is a policy that will not cover any death outside of an accident and even if you die on the operating table due to an accident that can be contested by the carrier. So whatever you do make sure that the policy you’re getting will cover you for both accidental and illness. Oh, before we forget to mention also remember to get a fixed level term because some policies will go up in rates every 1 or 5 years, that’s why you want to make sure that the rate you’re getting will be locked in for the entire term.
Individual Term Life A Better Option
If you’re legitimately concerned about paying off your mortgage in the case of unexpected death than an individual level term life insurance makes more sense. You will have full ownership of the policy with the amount of protection you desire. I usually recommend getting more coverage than the total mortgage amount since your family will have many other needs to cover. The great part is that the policy goes with you regardless of whether you refinance your home or change employers. Not only individual term policy costs less but you are able to leave the money behind to your family directly, so they can decide the best use for it. It also good to note that individual term policy will pay out regardless if you were to pass due to an accident or an illness.
Individual term life insurance policies can be secured for a period of time ranging from 1 year all the way to 30 years. If you would like to get a quote you have two options. You can go with a no medical exam option which is much faster but will cost more than the traditional term. The traditional term life insurance requires a medical exam with longer processing times but it’s where you will get the lowest premiums. Also if you need more than $500,000 of protection the no exam option will not work for you. At the end of the day, the choice is yours so click here for no exam and here for the traditional term life insurance plans. Simply pick your health rating, choose the amount of coverage, compare quotes and request an application.
