Many consumers seek to purchase life insurance with the mindset of protecting their loved ones financially in the event that they pass away prior to their life expectancy. The overall amount of coverage is intended to help keep a family at a similar standard of living based on the insured’s income, both current and future expected income. In order for a family to thrive after one’s passing, that money would be used for their living expenses, potentially educational expenses or future investments, and maybe even leaving money behind for a spouse’s retirement. Sometimes the money left behind with a policy is enough to cover the remaining mortgage on a house, but sometimes the remaining cost of the house is not factored in when considering how much life insurance coverage to purchase. In addition, some beneficiaries may not use life insurance proceeds as the insured intended and spend the money on things other than a home mortgage. For these scenarios in particular, there is a unique type of life insurance called “mortgage life insurance”.
Mortgage life insurance is a policy purchased with one particular goal in mind - pay off the remaining mortgage balance in the event that the insured dies or becomes unable to work. As this policy is set for a specific purpose, the money will usually just go straight to the lender and the risk of the money being spent elsewhere will not be something the insured will have to worry about. For those that are current homeowners, you may recall having been offered this line of life insurance during the process of filling out and signing paperwork for your loan and mortgage. It is usually strongly offered and anyone that declines this type of insurance is very aware of the decision as they will have signed multiple forms and waivers stating their intention to opt out of the insurance.
Similar to other types of life insurance we have analyzed throughout our blog posts, mortgage life insurance comes with positives and negatives as well. The main advantage to purchasing such a policy is knowing your home will be paid off and your family will not be thrown out on the streets if you were to pass away. Additionally, the payout will often kick in as well if you were to become disabled to the extent that you cannot work and pay for your home without the income you relied upon. However, this peace of mind does come at an expense and with some negatives.
One of the top disadvantages to purchasing a mortgage life insurance plan is the decreasing benefit of the plan vs the increasing amount of money you have put in to it. When you first get the plan, the payout would be quite large and you will not have paid out too much for it. On the other hand, as time goes on you will have paid out a lot in premiums and the coverage amount will diminish as less and less is owed on the mortgage. For any consumers that purchase new cars on a loan setup, this situation feels all too familiar. You constantly make car payments on your loan and the value of the car continues to greatly depreciate. In addition, there are reasons your insurance claim might be denied, making the financial aspect of this policy all the more frustrating.