Every year, thousands of families face foreclosure due to the death of the main income provider. Life insurance is often much more affordable than you think. In fact, most people overestimate the cost of life insurance by 300%.
Private mortgage insurance (PMI) vs. mortgage life insurance
It’s important not to confuse mortgage life insurance or mortgage protection insurance with private mortgage insurance (PMI) that lenders require when you put down less than 20% of the mortgage amount. Lenders require PMI in order to close on your loan.
Mortgage protection insurance is not required. It’s simply a way to increase your life insurance coverage when you get a new mortgage. You might receive letters that make it seem like mortgage protection insurance is required for your loan. Be sure to read the fine print. That’s where it will say that the coverage is optional and is offered by a third party.
Is mortgage protection insurance required when you take out a mortgage?
Absolutely not. When you move into your new home, you’ll probably be bombarded with official-looking letters implying that you need to get a life insurance policy. Make sure you read the fine print. These are scams in the sense that they mislead you into thinking it’s a legal requirement. While it is a good idea to get a life insurance policy (or increase the coverage you already have) when you take out a new mortgage, you are not required to do so.
The history of mortgage life insurance
Mortgage life insurance used to be a decreasing term policy that named your lender as the beneficiary. Today, mortgage insurance policies are guaranteed level term insurance policies, the same kind of term plans that you would buy if you wanted to replace your income to protect your dependents.
There are a few reasons you shouldn’t buy a decreasing term policy:
- With a decreasing term policy, if you ever would get a second mortgage, your life insurance policy could be worth far less than your new mortgage value.
- A decreasing term policy would make the bank the beneficiary. This eliminates any option your dependents would have. Perhaps they would use part of the death benefit for other emergencies.
- Most life insurance carriers stopped providing a decreasing term policy. It is mostly offered by banks.
Should you get a mortgage life insurance policy?
When you take out a mortgage, you’re taking on a debt. Your mortgage needs to be paid every month or you risk losing your home. If you have dependents who rely on you and your income, it’s a good idea to get a life insurance policy.
How important mortgage insurance is depends on your situation.
If you’re single, with no dependents, and you live alone:
It’s not needed. If you die, the bank takes over your home.
If you have dependents who require your income:
You should probably get mortgage insurance. The mortgage payment is a major expense for almost all families. You’ll want to have at least 10 times your income in life insurance coverage.
If you already have 15 - 20 times your income in life insurance:
You don’t need additional coverage from a mortgage insurance policy.
There are many reasons for getting a life insurance policy. Taking out a mortgage is one of them.
What if you already have coverage through your employer?
It’s a great idea to take advantage of inexpensive life insurance coverage at work. This is especially true if your employer is paying for at least part of the coverage as a benefit. The problem with life insurance coverage through your job is that you lose the coverage when you leave or if your employer decides to no longer offer the benefit.
If you have dependents and only have coverage through work, you should look into getting a term insurance policy that you own yourself.
What kind of life insurance is best for mortgage insurance?
Because mortgages are term loans that are scheduled to be paid off at the end of the term, term life insurance policies are most often used to cover that kind of debt. It’s best to get a life insurance policy that you own, rather than life insurance coverage you might have through your job.
Term life insurance
Most term life insurance policies are medically underwritten, which means there’s a comprehensive medical questionnaire you’ll need to complete during the application process, and in many cases, a medical exam is required.
Highlights:
- Affordable
- High coverage
Coverage amounts:
$25,000 - $5,000,000
No exam life insurance
Another popular option is a type of term life insurance policy that doesn’t require a medical exam. These are the same plans that do require an exam, but often they have a maximum coverage amount of less than $500,000. If you’re in good health, there are plans that offer up to $1 million in coverage without requiring a medical exam.
Highlights:
- Affordable coverage
- No medical exam
- Quick application process
Coverage amounts:
$25,000 - $500,000
Instant approval life insurance
Many insurance companies offer what is called instant issue life insurance policies. You fill out an application online or over the phone, and the insurance company provides an instant decision. If you are declined, you can offer to take a medical exam and request reconsideration.
Highlights:
- Instant decision
- No medical exam
Coverage amounts:
$25,000 - $250,000
Accidental Death Insurance
If you have some health problems and find that you are only eligible for higher-priced plans or that you are deemed uninsurable by insurance companies, then an accidental policy is an option to consider. Accidental life insurance or accidental death benefit policies only cover you for death caused by an accident. Accidents are the number one cause of death for people under the age of 50, and the fourth leading cause of death for those over 50. Of note, accidental policies are inexpensive, and you don’t have to answer any health questions.
Highlights:
- Most affordable
- Can not be denied
- Instant issue
Coverage amounts:
$25,000 - $250,000
Summary
Mortgage life insurance is not a requirement. When you buy a home, that information is made available to the public. You can expect to receive life insurance offers in the mail.
If you receive an official-looking letter (it may even be pink or yellow to make it seem more “authentic”), read the fine print. We would never advise you to ignore notifications that appear to be urgent, but the mortgage life insurance offers you receive in the mail are often intended to confuse you.
Our advice: If you want a life insurance policy, play it safe and contact a licensed professional.
We can shop for you, and present you with various options, at no-cost and no-obligation.
Call 1-855-458-1985 or submit a request online.
