Mortgage life insurance pays your mortgage if you die when the policy is active. But, what if 20 or 30 years from now, instead of owning one home, you own two houses and a boat worth as much as a house? Or what if you're single now but you have a family when you die? Protecting a single investment such as your mortgage when you die isn't the best way to provide financial support to your survivors after your death. Unless you can't qualify for term life insurance, the disadvantages to mortgage life insurance outweigh its advantages.
Mortgage Life Insurance
Imagine taking out a life insurance policy that pays $100,000 if you die today but only pays $1,000 if you die in 15 years. The more money you pay toward the policy, the less money it's worth. That's exactly what mortgage life insurance does. As you pay your premiums, you also make your mortgage payments, and your benefit gets progressively smaller. Since your bank or mortgage company is the beneficiary of the policy, it's an insurance policy you pay for that directly protects your lender.
Financial Priorities When You Die
Buying a mortgage life policy today is a decision that paying off your mortgage will be the highest-priority financial matter to resolve when you die. Because the beneficiary is the lender, the policy eliminates everyone's ability to change that decision. Unless you can predict the future, you probably don't know what your financial or family situations are going to be when you die. Rather than forcing arbitrary rules, it's generally better to provide your family with money directly from an insurance policy and enable them to decide the right way to spend the money given their financial situation.
Use an online tool to help estimate the total amount of money you'd like to leave to your family when you die, including money to pay for liabilities such as a mortgage and income that your family might have to replace if you were working when you passed away. Once you understand your financial goal, then you can shop for insurance and other investment products to achieve your goal.
Term Life Insurance
A standard mortgage life policy is a 15-year policy. If you're 36 or younger in New York or 46 or younger in all other states, you might be able to get a 30-year policy. A 30-year term life insurance policy doesn't decline in value, provides money directly to your survivors and enables them to determine their financial priorities at that time. For the same premium amount, you can probably get a term life policy that provides enough to pay off your mortgage and to have some left over for other expenses.
Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.