Insurance is risk management. So, for each type, you need to identify the risk to be hedged and the best way to do it. Mortgage life insurance, like other types of insurance, can be expensive, so you need to understand that the inherent risk is the same as regular life insurance. Also, there are different ways to get it.
Financial institutions sell mortgage life insurance to protect against potential loss in the event of the death of mortgagees. Financial entities, instead of relatives or others that you choose, benefit from these policies.
Let’s take a closer look at how mortgage life insurance might come about. If you took out a $100,000 loan from a bank to buy a house, the bank would write your name on the title to the property and thus you would become a joint owner up to the value of the loan. This is the typical mortgage.
If you die before paying off the mortgage, the bank would have two options. You could sell the house and give your beneficiary the difference between the sale amount and the outstanding loan. Alternatively, you could allow your beneficiary to take over the home loan and pay it off. To do the latter, the bank would need to feel comfortable with the beneficiary’s finances after the beneficiary’s death. The bank might accept the alternative if your life insurance and other assets provided enough income to pay the mortgage and provide your dependents with an acceptable living income.
Another way to deal with mortgage insurance when you get a mortgage is to insure your life for the full value of the mortgage. This would supplement existing regular life insurance coverage. This doesn’t take a comprehensive look at your finances though, so I don’t think this is the way to go. You may not need more insurance.
Mortgage life insurance sold by a financial institution can be expensive and has drawbacks. First, the insured amount falls as the mortgage balance falls over the life of the mortgage, but the premium does not fall. Second, unlike a term life policy, the bank has the right to increase the premiums. Third, it is not portable. Therefore, if you change your mortgage, you must reapply for life insurance with your new bank.
It would be best if you review your financial affairs and if necessary purchase additional term insurance from an insurance company. You would own the policy. The financial institution would not. Your spouse or other people you choose would be the beneficiaries, not the bank. And your spouse or dependent would have the option of taking over the mortgage, if that alternative was the best option for them.
Like all financial decisions, listen, listen, and understand your alternatives, and let the Lord guide your decision.
(C) 2011, Michel A. Bell.