Is mortgage life insurance worth it?

If you’ve been shopping around for a mortgage, you may have heard of mortgage life insurance as a way to protect your family and your home if the unthinkable happens. But do you really need it?

Mortgage life insurance offers protection for your mortgage if you were to pass away. But there are better options available to safeguard this important financial commitment and those who depend on you.

Read on to learn more about what mortgage life insurance is and whether or not it’s right for you.

What is mortgage life insurance?

Mortgage life insurance is a type of life insurance policy offered by your bank or mortgage provider. Its purpose is to help pay off your mortgage if you were to pass away. You can purchase life insurance through a bank, a broker, or directly from the life insurance company.

The premiums for this insurance are determined based on your age and mortgage amount. They are usually added to your monthly mortgage payments and remain constant, even as your mortgage balance reduces over time.

In the event of your passing, if there is still a balance remaining on your mortgage, the insurance provider will cover the outstanding amount, allowing your family to keep their home without any financial burden

How much does mortgage life insurance cost?

The price of mortgage life insurance is linked to your current age and your mortgage balance. 

The premium does not consider lifestyle choices or medical history, such as smoking or engaging in high-risk activities like skydiving. As a result, the insurance provider charges a higher premium to offset the uncertainty of having to pay out.

Though the payout amount decreases overtime as you pay off your mortgage balance, your premiums remain the same throughout your policy.

As you age, your premium will increase significantly. This means that if you switch to a new lender and need a new policy in the future, you will most likely have to pay higher premiums.

Is mortgage life insurance worth it?

It may seem like a no-brainer to safeguard your family by including mortgage life insurance premiums in your regular mortgage payments. But keep in mind that this insurance can be costly since it is not underwritten, and the premiums remain constant over the duration of your mortgage. On top of that, as your mortgage balance reduces, the benefit paid out in the event of your death also decreases.

On the other hand, mortgage life insurance is straightforward to qualify for, making it a suitable option for certain families. 

Below, we’ll examine the advantages and disadvantages of mortgage life insurance to help you weigh your options.

Pros and cons of mortgage life insurance

It’s important to take into account the benefits and drawbacks of mortgage life insurance before committing to purchasing a policy. Let’s walk through what this type of policy has to offer and where it falls short.

Mortgage life insurance: advantages

• Insurance premiums for mortgage life insurance can be conveniently included in your monthly mortgage payment.
• Your mortgage will be paid off if you pass away, so your family will own your home outright.
• This type policy does not require a medical exam, making it a good option for individuals who smoke or engage in other high-risk activities.

Mortgage life insurance: disadvantages

• Because it is not underwritten, premiums for mortgage life insurance are typically more expensive. This means that regardless of your age, health status, or risk factors, you pay the same rate.

• If you pass away, the benefit from the insurance policy is paid directly to the mortgage lender rather than your loved ones.
• Your insurance premiums remain the same even as your mortgage balance (and therefore the payout) decreases.

• If you switch mortgage providers, the insurance policy does not transfer with you. This means that you will need to purchase a new policy, which will likely be more costly.
  

When is mortgage life insurance a good idea?

Mortgage life insurance is not mandatory and should be considered as a final option when you are unable to qualify for another type of life insurance policy due to medical reasons. 

Wit that said, it may be easier to get approved for this type of insurance since there is no medical examination required. Since mortgage insurance does not require a detailed understanding of the applicant’s health, providers adjust their rates to accommodate both high and low-risk individuals.

Alternatives to mortgage life insurance

You want to make sure that even in the event of your passing, your mortgage is covered. If mortgage life insurance doesn’t seem like the right fit for you, try term life insurance.

With term life insurance, you choose your coverage amount and the duration of your term, most often 10, 20, or 30 years. If you’re primarily looking to cover your mortgage, for example, you can choose a term length that matches the duration of your mortgage so that your family is covered for your entire mortgage period.

Term life insurance pays a tax-free lump-sum directly to your loved ones if you were to pass away during your term length. Your family can use this amount to cover any financial needs they might have, including mortgage payments, your children’s education, or final expenses.

Because the payout goes to your family and not to your mortgage lender or bank, you can rest assured that the unique financial needs of your family are being taken care of, and not just your mortgage.

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It’s important to have some form of protection in place for your family and mortgage in the event of the worst-case scenario. However, mortgage life insurance may not be the best option for you. The coverage decreases over time and there won’t be any benefit for your loved ones once the mortgage is paid off. 

On the other hand, term life insurance provides more flexibility and lower premiums, and your family will be protected from more than one angle.