The average price of a new home exceeded $257,000 as of September 2010, according to the U.S. Census. Few home buyers can afford to pay that kind of cash for a home. Most take out a mortgage, a secured loan, to buy their home. This can work out fine as long as the homeowner stays healthy and makes his payments on time. But what happens if the family's primary breadwinner dies? For many, the solution to this problem is mortgage life insurance.
What is mortgage life insurance?
Mortgage life insurance, in its simplest form, is a specific type of decreasing term life insurance policy taken against the life of the homeowner that designates the mortgage company as the beneficiary in the event of the homeowner's death or disability. Originally, these types of policies were written for the full amount of the mortgage, with the payout decreasing in value at the same rate at the payoff amount of the mortgage. Recent versions of mortgage life insurance may offer level term insurance with a payout that remains at the original amount of the mortgage, regardless of the amount that has been paid toward it.
Mortgage life insurance is typically offered to the home buyer during mortgage closing procedures. In many cases, this type of life insurance is offered without the requirement of submitting to a medical exam. This can be a means for those with less-than-excellent health to obtain life insurance that might otherwise not be available. The primary advantage of mortgage life insurance is the peace of mind of knowing that if something happens to you, your home will be paid in full so your loved ones will have a secure place to live without worrying about how to pay the mortgage each month. Many policies will remain in effect for the full term of the policy, even if you pay off your mortgage early.
Traditional mortgage life insurance policies require the mortgage company to be the beneficiary. In the event of your death, the payout will be made to the mortgage company regardless of whether your surviving heirs have the means and desire to continue making regular mortgage payments. Traditional mortgage life insurance policies decrease in value as the mortgage is paid down. Mortgage life insurance is typically more expensive than comparable level term life insurance. This is in part due to the minimal underwriting required by mortgage life insurance policies.
A good alternative to mortgage life insurance is a level term insurance policy in an amount equal to or greater than the original mortgage. While mortgage life insurance can usually be purchased only for the amount of the mortgage, level term life insurance can be purchased for a larger amount. The payout can be used to pay off the mortgage and also help with funeral costs, the kids' educational needs, living expenses during the transition period or anything else your loved ones wish to use it for.
The decision to purchase mortgage life insurance is a personal one, and ultimately only you know whether it is the best choice for your situation. It is important to make sure your family is protected in the event of your death, so some type of provision needs to be made. You should carefully weigh the costs of all of your options against their benefits before making a decision to either purchase or decline mortgage life insurance.
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