COVERING YOUR LARGEST DEBT
Understanding Mortgage Life Insurance
Mortgage life insurance is required by many banks to protect their investment. However, while they can insist that you have life insurance to cover the debt, they cannot require that you get that insurance with them. Many people prefer to use a traditional life insurance plan that provides enough coverage to pay the mortgage and look after other needs for the beneficiaries.
Whether you’re a first-time home buyer or purchasing a vacation property, if you have a mortgage your lender will ask you to purchase mortgage insurance. However, they cannot require you to buy it from them.
Like every other life insurance policy, with Mortgage Life Insurance a death benefit is paid if the insured person dies. Mortgage insurance is usually not the most cost effective and flexible way to protect your assets and family. In almost every case there are less expensive policies than those offered directly by the mortgage lenders.
What you need to Know
As time passes and you dutifully make your mortgage payments, in addition to servicing the debt by paying interest, you are paying down the outstanding amount of borrowed capital. Mortgage insurance will pay a death benefit equal to the amount of outstanding debt. That is, each time you make a mortgage payment, or even an annual lump-sum payment you are lowering the amount of your death benefit.
If health problems arise making it difficult or impossible to qualify for insurance elsewhere, you could very well be “trapped” into staying with your existing lender. This is because the bank-issued coverage is attached to your lender. It is far better to own your coverage independent of the mortgage.
If you own your house jointly with your spouse, you will both typically be covered jointly with your bank-issued mortgage life insurance. The problem here is that, if one spouse dies, the surviving spouse has no more insurance coverage, as the coverage pays out and the joint-insured’s coverage ends. This may not be optimum, as the surviving spouse will often have continuing needs for life insurance coverage.
More importantly, insurance purchased through a licensed insurance professional can be integrated with your overall financial plan. The ultimate design of a plan that properly protects your family certainly deserves professional attention.
The Bottom Line
Mortgage insurance pays off your loan, directly to your lender. Insurance you purchase personally pays the death benefit to your named beneficiaries. The beneficiaries will then have freedom to decide whether it is best to pay off the mortgage, and when.
Over the duration of your mortgage, you will usually get better value by arranging your insurance independently and avoiding mortgage insurance from the banks.
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