Why homeowners need some sort of life insurance protection
Until it’s paid off, there’s plenty of financial risk built into your mortgage. If you can’t make the monthly payments, for example, your bank could sell your property to cover its losses. That’s why many homeowners enter a mortgage with someone else — like a spouse, partner or even a co-signing parent. Often, this person is helping limit the financial risk of buying a home.
But, what happens if you were to pass away unexpectedly? Your co-signer could end up facing that financial responsibility of a mortgage alone. If that happened, it could undermine the stability you have worked so hard to provide. That’s why having some type of insurance coverage in place is so important — it helps provide a financial cushion to your beneficiaries if you were to die.
Life insurance to protect your mortgage comes in two main forms: Term Life Insurance and Mortgage Protection Insurance.
Why term life insurance is a better value than mortgage protection insurance
When you buy term life insurance, you get to choose a coverage amount and term length that meets the needs of your family. If mortgage protection is your primary goal, choose a coverage amount that would pay off your mortgage and a term length that’s at least as long as the life of your home loan.
But for most families, there’s more financial protection needed than merely an amount that covers your mortgage payment. You should consider income replacement for both spouses, day-to-day bills, and the cost of childcare and your children’s education… to name a few of our many financial responsibilities.
Flexibility is one of the significant benefits of a traditional life insurance policy. You can purchase coverage that not only helps protect your family from needing to pay off a mortgage without you, but can also help ease the financial burden of day-to-day life. Another key benefit? Affordability. Medically underwritten term life insurance is usually more affordable than mortgage protection insurance.
Not sure how much is needed for “day-to-day” life? No problem. A life insurance calculator can look at your income, family structure and debts to help you determine the right policy for your needs.
Term life insurance vs mortgage protection insurance
Mortgage Protection Life Insurance
Term Life Insurance
|Amount of coverage offered||Your mortgage principal, which decreases as the loan is paid off||A coverage amount of your choosing|
|Length of coverage||Your mortgage length||10, 15, 20,25, 30, 35 & 40 year term lengths are available|
|Affordability||Usually is less cost-effective than other types of life insurance||Medically underwritten term life insurance is one of the most affordable types of coverage|
|Beneficiary||Usually your mortgage lender||Whomever you choose|
|When death benefits are paid||Sometimes only accidental death||Few exclusions on what type of death is covered|
|Underwriting||No medical exam required||Often requires a health screening for affordable pricing|
Disadvantages of mortgage life insurance
- Mortgage protection coverage decreases over time
For many buyers, the mortgage life insurance payout amount declines over time. If you’re wondering whether you still have to pay the same premium every month for a smaller face value, yes, you do if it has level premiums. That means the amount you pay every month does not change even if the value of the policy goes down.
- Mortgage protection coverage is more expensive than medically underwritten term coverage
Mortgage protection insurance is usually a type of simplified issue life insurance coverage, which means you don’t have to undergo a medical exam and the underwriting process is less precise. Typically, the less an insurance company knows about you, the more risk they are taking on in insuring your life. Because of this added risk, mortgage life insurance is usually going to be more expensive than a medically underwritten term life insurance policy.
- Payment of the policy may depend on how a policyowner dies
Some mortgage life insurance policies will only pay a death benefit if you die from an accident, like accidental death insurance. Regular life insurance has fewer exclusions — usually suicide within the first two years or an illness that was intentionally not disclosed in the application process — than mortgage life insurance on whether a policy will pay out death benefits.
- A mortgage protection payout is paid directly to the lender
A mortgage protection life insurance payout (called a death benefit) is usually paid directly to the mortgage lender. Therefore, the proceeds of a policy cannot be used as your family chooses. Generally, with a life insurance policy, you have coverage in place so that your loved ones will have a financial safety net that can be used however they need or wish — everyday expenses, childcare, a funeral and, yes, mortgage payments. With mortgage protection insurance, your family usually has no choice of how the funds are used as the money will go directly to the lender to pay the mortgage balance.
Once you’ve taken the time to think about your day-to-day responsibilities and how you’d like to protect your income and mortgage, feel free to get a term life insurance quote with our trusted partner.