Monday, September 24, 2007

Do You Need Mortgage Life Insurance?

By Mary Pollman – SelectQuote

Home means security – physical and financial. But home also means risk. The mortgage is most families’ biggest liability.

So when we think about how much Life Insurance we need, we usually start out thinking about how much it would take to cover house payments. Our biggest fear is that, without our income, our loved ones may no longer have a roof over their heads – or they may still have a roof, but not of the same quality or quantity.

That’s why Mortgage Life Insurance has such intuitive appeal. I die; my mortgage is automatically paid off. I will have enabled my family to maintain their standard of living. I will have taken care of my spouse’s biggest financial worry.

Why Mortgage Life Insurance is usually a bad idea
Or will I? Maybe my spouse would rather figure out some way to continue making mortgage payments and put my death benefit proceeds into a college fund for the kids instead. Or maybe my family would rather sell the house and get something smaller in order to make my death benefit last longer – buy more groceries, pay more utility bills. They don’t get to make decisions like that if my death benefit automatically goes to the mortgage company.

It’s always a good idea to be a little cautious of narrowly focused insurance – and mortgage life insurance is narrow. It solves just one of the family’s financial problems. If you die, they may have quite a variety of financial problems.

Mortgage Life Insurance has a poor payout record – per the NAIC
There are other issues with mortgage life insurance. The National Association of Insurance Commissioners (NAIC) says that only 40 cents of every dollar spent on mortgage life insurance is ever paid out in benefits. This contrasts with 90 cents of every dollar spent on ordinary term life insurance policies. I can think of at least two reasons for this:

1) The policies are far more expensive than ordinary term life insurance. Whatever the death benefit is, I’ve paid a lot more for it.
2) With many of these products, the policies are tied to the mortgage such that, when the house is sold and the mortgage is paid up in the transaction, the policy ends. I paid the insurance company lots of money in premiums. And I have nothing whatever to show for it.

Should you ever consider buying mortgage life insurance?
So, is the message simply ‘don’t buy mortgage life insurance?’ Not quite. It’s more like ‘don’t buy mortgage life insurance if you’re healthy.’ If you’re not healthy, mortgage life insurance has a big advantage: No physical exam is required. One of the reasons it’s expensive is that it’s very easy to get.

But if you’re healthy, you’ll get better coverage at a far better price with a good 15-, 20- or 30-year level-premium term product. If something happens to you, a) your spouse (instead of the mortgage company) gets the death benefit, and b) your spouse gets a much bigger death benefit for the same premium. So, if the priority is paying off the house, there’s a lot more cash available to do it. AND, there’s cash for other needs, current and future.

Note on decreasing term life insurance
This is a type of life insurance that’s rarely seen in the marketplace these days, but if it is, it’s usually in a mortgage term life insurance product. With a policy like this, your death benefit drops year by year, because it’s pegged to your mortgage – which gets smaller as it gets paid down. But the premium payments don’t go down. They stay the same from day one. The insurance company will say that’s because, though the amount they have to pay if you die is going down, the risk that they’ll have to pay it is going up, simply because you’re a year older. So, they argue, it all evens out. That may be a defensible argument, but it just doesn’t “feel right” to most consumers, and decreasing term has fallen out of favor in the marketplace.

Note on return-of-premium term life insurance policies
We mentioned the NAIC statistic – 40 cents paid out for every dollar paid in on mortgage life insurance. Progressive insurance companies are turning the tables completely, offering term life insurance that pays a dollar back for every dollar you put in – if you live. (If you die, the policy will provide a much better payback than dollar-for-dollar.) If you buy one of these return-of-premium (ROP) policies and hold it to term, the company will have made enough on your premium dollars that they can afford to give them all back to you.

It’s a good idea to consider ROP products whenever you’re shopping for term life insurance. But there’s a neat wrap if you’re buying a policy mainly to offset a mortgage liability. Get a 30-year mortgage. Buy a 30-year ROP term policy. When the 30 years are up, the house is yours and all the insurance premiums fly back home too. Sweet.

About the author. Mary Pollman, CLU, has been writing about life insurance, long-term care insurance and annuities for more than 20 years. She has contributed to insurance publications, websites, consumer product literature and agent training. Mary held senior management positions in communications and marketing with two life insurance companies. She is an editorial advisor to SelectQuote.


We can show you a better way to insure your mortgage.
A SelectQuote Licensed Expert can show you excellent alternatives to mortgage life insurance: level-premium term life insurance policies – with and without return of premium – from the highly rated Term Life Insurance companies we represent. Quotes are free. Call toll-free 1-888-739-7965. Or go to our website, .

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