Mortgage Life Insurance: Is It Worth the Cost?

Edward Bridges
8 years ago

Americans insure their cars, lives and homes. Does this mean that when the offer to insure the life of your mortgage comes in the mail that you should insure this too? Mortgage life insurance is an offer that typically comes from your lender and the message can be quite compelling. With a mortgage life insurance policy in place, if something happens to you, your heirs will not have to worry about making your home loan payments. As is the case with most financial decisions, however, there are pros and cons to buying mortgage life insurance. Let’s explore them:

What Is Mortgage Life Insurance?

Mortgage life insurance is a special type of insurance policy for homeowners that have a home loan. The mortgage insurance offers that fill up your mailbox after the purchase or refinance of a home either comes from the mortgage lender or one of its affiliates. The premiums you pay on this type of insurance policy provide coverage to pay off the amount of your mortgage in the event of your death.

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Pros

As humans, we tend to insure the most important things in our lives, or at least those that have the highest values—our homes, our lives and our vehicles. One of the primary advantages of putting a mortgage life insurance policy on your home is that it takes the pressure off your heirs. If you pass away and still have a home loan balance, your heirs do not take on the responsibility to pay your mortgage payments or your mortgage balance from your estate, their own pockets or your life insurance money. Some buyers of mortgage life insurance buy this type of insurance strictly to remove the burden from their children or other heirs.

While paying off your home loan is a financial advantage, an emotional advantage to establishing a mortgage life insurance policy is the “sleep factor” – it may help you sleep better at night. If you tend to worry about what will happen to your spouse, kids or grandkids when you’re gone, mortgage life insurance can lift this emotional burden. As is the case with any insurance policy, the mortgage life insurance policy helps to protect you from what may happen in the future. In this case, it is mortgage payoff protection in the case of your death.

Cons

The primary disadvantage of this type of policy is the cost. Mortgage life insurance requires you to make a monthly premium payment, which can add up to thousands of dollars each year. Most financial experts agree that you getter a bigger bang for your buck by buying a large enough life insurance policy to cover all of your needs, including paying off your home loan. One large life insurance policy allows you to insure everything you need to insure at a lower overall cost than establishing a special life insurance policy for your mortgage alone.

Another disadvantage is a loss on the value of the policy as the balance on the mortgage decreases. For example, if you insure the mortgage balance of $100,000, but the balance when you pass is only $50,000, your heirs do not receive the difference of the policy amount back.

As a homeowner, placing a mortgage life insurance policy on your home has its advantages and disadvantages. The marketing materials promoting this type of policy can easily lead you to believe that this is a type of insurance policy you should have. Since it is a major financial decision, take the time to assess the pros and cons before buying in.

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