Taking the plunge into home ownership is a very big step. You’re looking at a lot of hoops to go through especially with getting a mortgage. One of the aspects of the mortgage process that might hit you by surprise is how quickly the bank will offer you mortgage insurance. Not the kind that protects the loan like private mortgage insurance, but the kind that pays off the mortgage if you die or become disabled. Whether mortgage insurance is worth it might depend on how you evaluate your financial risk and also where you buy it.
Buying insurance sometimes comes down to whether or not you feel you need it. In the case of your mortgage, it can be easy to feel insecure about what would happen to your home if you or your significant other died or couldn't go to work because of an injury or accident. If you count on two incomes like so many couples do these days, the finances could take a hard hit if one of those incomes suddenly disappeared. In those cases it can be well worth getting some mortgage insurance for the financial security.
Coverage at Work
You may think that the life and disability insurance you get from a group plan at work can help pay all the bills if something goes wrong, but sometimes those coverages can fall short of your needs. Group life insurance may only cover you up to two times your salary and that money might not cover your portion of the mortgage plus your spouse’s ongoing financial needs if you die. Also, if you leave your job to take a new one where you get little or no benefits, there goes the insurance you thought would always be there to protect you.
Mortgage Life Insurance
Suppose you decided to get some life and disability mortgage insurance. Now it’s time to decide what type of product to get. Banks and insurance companies offer products specifically designed to cover only the mortgage, but they might come with limitations and restrictions. The coverage the bank offers you belongs to the bank, not you. You change banks and the coverage doesn't come along. You have to start all over again with new coverage at the new bank. Mortgage life insurance also typically only covers the mortgage balance and therefore declines as you pay down your principal. You wouldn't be able to use the proceeds for anything else because you would use up all the funds to pay off the mortgage. Mortgage disability benefits would only make your mortgage payments until the mortgage is paid off. If you’re still disabled and you need your benefits to continue afterwards, you're probably out of luck.
If you consider your mortgage as only one part of your overall financial security needs, consider having a look at private insurance. A cheap term insurance policy might not cost that much more than mortgage insurance, and it will allow you to protect all of your short-term needs -- not just the mortgage but emergency funds, setting up an income for your spouse and funding the kids’ education. The same could go for private disability insurance used to top off coverage at work or to replace your existing income to cover all of your bills rather than just the mortgage payment. Since private coverage belongs to you and is not tied to the amount of your mortgage or who your lender is, you can change banks and still be protected.
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