When you’re wrapping up your mortgage paperwork, you’ll often be offered mortgage life insurance and may even need to complete several forms if you choose to decline it. This insurance is heavily emphasized during the signing process because it protects the lender by ensuring your loan gets paid off if you pass away. Essentially, mortgage insurance settles your entire mortgage if you die. While this can be beneficial sometimes, most people find that regular term life insurance provides similar protection but at a lower cost.
Why Is Mortgage Life Insurance Typically More Expensive?
Initially, mortgage life insurance premiums might resemble those for term life insurance policies. However, as time goes on, your mortgage premium stays the same while the payout amount decreases. This setup allows mortgage life insurance companies to keep their rates comparable to term life insurance without requiring a medical exam. However, it results in a less favorable cost-to-benefit ratio compared to term life insurance, where the payout shrinks as you pay off your mortgage.
Term Life Insurance Offers More Flexibility
In addition to cost, another key difference is control over the benefits. With mortgage insurance, the insurer pays the bank directly, which means your dependents won’t have to worry about mortgage payments. But if your dependents don’t want to keep the house, this insurance doesn’t provide much financial help—they’d need to sell the house to get any benefits. On the other hand, term life insurance payouts can be used however the beneficiaries wish.
When Is Mortgage Life Insurance a Better Option?
Mortgage life insurance might be more appropriate if you’re not healthy enough to qualify for a regular term life policy. Because it doesn’t require a physical exam, those in poor health often find mortgage coverage more accessible. If traditional term life insurance isn’t an option, mortgage life insurance can offer some financial protection for your dependents.
However, if you can get a term life policy, it usually provides a higher payout for less money. The benefits go directly to your listed beneficiaries, giving them the flexibility to use the funds as they see fit. Financially, term life insurance is often the better choice, not just for you but for your loved ones as well.
That doesn’t mean you should immediately buy a term life insurance policy equal to your mortgage amount. It really depends on your personal situation. For instance, could you manage to keep paying the mortgage if your spouse passed away, or vice versa? If the answer is no, then life insurance could be important. But if you or your spouse could handle the mortgage payments alone and have little debt, you might not need life insurance at all.