Term Life Mortgage Insurance: Do You Need It?

Understanding the requirements
When you purchased your home, did your bank tell you that in order to get the financing you wanted you had to include "mortgage insurance"? Or perhaps "mortgage life insurance"? Did you know there was a difference in the protection they provide?

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Mortgage insurance is simply a type of coverage that protects the bank in the event that you default on the loan. You pay the premium, and if you fail to keep up with your house payment, the bank can claim the insurance if they are unable to sell the house for the amount of the debt. The coverage is usually a level benefit, and if you are unable to put at least 20% down when purchasing the house, the lender will often require the insurance. He is, however, supposed to drop the insurance when the balance of the loan falls below 78% of the value of the property.

Mortgage life insurance is a little different as it is intended to pay off your home loan balance in the event of your death. Many policies also make payments if you should become disabled. This type of coverage is often marketed by a third party or a company affiliated with your bank. Since these policies are usually mass marketed, the medical underwriting requirements may be less stringent than a traditional life insurance.

Fine print of mortgage life insurance
Most of these kinds of policies were at one time decreasing terms. These are still available from some companies and are very inexpensive because the amount of money the insurance company has at risk decreases with the passage of time. The idea is that the policy decreases as your mortgage decreases. Most financial services advisors feel that this type of policy is not in your best interest because you pay the insurance for years, and have nothing at the end of the term.

Insurance companies now offer level term policies. You can get it for a 20 to 30 year period—or for the life of your loan. Since the face value remains constant, if something happens to you after a large percentage of the loan amount has been paid, your family will have the difference.

The primary advantage of mortgage life is that it is usually very easy to get. You still need to check for prior existence clauses and exclusions, but people with chronic health conditions can often get term life when they can't get any other kind of life insurance.

If you health is good, most advisors will tell you that the purchase of life insurance for a single, narrow purpose is generally not in your best interest. If you should die, your spouse and children will need additional money as well. In fact, if they are able to pay your home loan without you, they may realize more of a tax advantage by keeping the mortgage and using life insurance money to pay other expenses. Thus, you should take account of your overall financial situation and choose life insurance according to what your family will need, not according to what it might take to pay one bill. Term life insurance might be a better choice and is also very cheap.