When you buy a house, it is one of the most overwhelming, yet rewarding purchases of your life. The worry of “will I be able to make the payment” or “did I buy the right house” seems to be a norm.
But after all the paperwork has been signed, you have the excitement of being a homeowner and beginning a new chapter in your life.
With a purchase of a new home comes more responsibility that you may have had when you were just a renter.
Yard work and routine maintenance around the house probably come to mind, but your biggest priority after purchasing a home should be to protect your loved ones in the event of sickness, disability, or death.
The only way this can be done is with either life insurance or mortgage protection life (which is life insurance sold by the banks), unless you are self-insured (having enough money saved to pay off debt). If that is the case, then I would have to wonder why you had a mortgage in the first place.
Since most of us aren’t fortunate enough to be self-insured we are going to go over what is the best option to protect you loved ones and mortgage if a tragedy were to happen. We are going to break down and analyze a traditional term life policy and a mortgage protection policy to see which is actually the best bang for your buck.
Mortgage Protection insurance, which is offered through your lender, is often recommended to make sure your home is paid off if you were to pass away while still making payments.
And of course, many people jump on this offer because who doesn’t want to protect their loved ones. It’s even called mortgage protection insurance so it must be important, and it is, but let’s not move to fast. Always do your due diligence especially with a decision of this magnitude.
Even though mortgage protection insurance through your bank may seem like a “no brainer,” the reality is that there may be better options out there if you look around.
The Major Differences
The Death Benefit
When you pass away, mortgage protection insurance and term life insurance are earmarked to pay off the remaining balance left on the mortgage. This ensures your loved ones are not burdened financially.
Mortgage protection insurance’s death benefit only pays off what is owed on the mortgage, which if not planned accordingly may not be enough for your loved ones. This means that your death benefit decreases every time you make a mortgage payment, to eventually it dwindles down to zero and the mortgage is paid off.
When you bought your home, your added mortgage protection insurance with a benefit of $200,000 (price of your home). In year 20 you pass away, owing $45,000 on your house. The mortgage protection policy will pay off the mortgage ($45,000).
If the surviving spouse doesn’t have money to pay taxes or regular life expenses they could still lose the home or have to sell. Mortgage protection insurance doesn’t cover those costs.
You are only able to cover the mortgage and nothing more with mortgage protection insurance.
With term life insurance, the death benefit remains level for the duration of the term period (10-30 years).
If you own a $200,000 term life policy, and you owe $45,000 on your mortgage when you pass away, your beneficiaries will receive the full $200,000.
You are allowed to purchase more than what you owe on the mortgage, which allows to protect your other financial obligations, not just your home.
Since every time you make a mortgage payment, and the value of the death benefit decreases, mortgage protection insurance doesn’t give you the best bang for your buck.
Here is the main concern: while your benefit is decreasing with every payment, your monthly insurance premium stays the same. Your essentially paying the same for less coverage.
Yes you could start out with a premium for $200,000 and eventually be paying the same premium for much less benefit. Not a cost-effective idea at all.
Term life insurance offers a level premium for the entire duration of the policy and the like we mentioned earlier, death benefit also remains the same.
When most people purchase a mortgage protection policy, the biggest misunderstanding is who the beneficiary of the policy is.
For most, it seems logical that your loved ones are the beneficiary, but this is not the case with mortgage protection insurance sold by the bank.
The lender of your mortgage is the beneficiary, not your loved ones. This is one of few instances where you do not get to name your beneficiary.
Since you are not in control of the policy, it seems these polices do more to protect the lender than the borrower.
With you purchase term life insurance policy, you name your beneficiaries. You control who benefits from the policy and can even name multiple beneficiaries.
Another major problem mortgage protection insurance is if you decide to buy a bigger house or refinance with another lender, you have to qualify again for the protection.
Remember your mortgage is tied to the lender, who is the beneficiary
You are not able to just transfer your mortgage protection insurance to the new lender. Also if you purchase a new home, its likely not going to be enough anyways.
The disadvantage to having to re-apply is that you are going to be older and could have developed health issues which means, higher premiums.
A term life policy is portable, if you refinance or buy a new home, the policy still protects you and your family.
Quick and Easy is not the Best
Mortgage protection insurance is purchased a lot of times because it is convenient to purchase the coverage from your lender. Often times the premium is added to the mortgage.
The problem is that your lender is just that, your lender. He or she are not insurance professionals and are not properly trained to explain the pros and cons of their policy compared to traditional term life.
Just because it seems easy, always know what your options are. Making the wrong one could cost you and your loved ones dearly.
If you can’t tell, your best option when protecting your home is term life insurance. The premiums are level, death benefit is level, and you name your beneficiary. With this said, mortgage protection insurance is the best choice for some individuals. It’s always a good idea to speak with an insurance specialist and let them show you all that is offered. The more you know, the better decision you can make. If you have any questions please don’t hesitate to give us a call.