Insurance is risk management. So, for each type, you need to identify the risk to cover and the best way to do it. Mortgage life insurance, like other insurance types, could be expensive, so you need to understand that the inherent risk is the same as for normal life insurance. Besides, there are different ways to get it.
Financial institutions sell mortgage life insurance to protect them from potential loss on the death of mortgagees. Financial institutions, instead of family members or others you choose, benefit from these policies.
Let’s look more closely at how mortgage life insurance might arise. If you borrowed $100,000 from a bank to buy a house, the bank would write its name on the property’s title, and so, become a co-owner up to the loan’s value. This is the typical mortgage.
If you died before you repaid the mortgage, the bank would have two choices. It might sell the house and give your beneficiary the difference between the amount they got on sale and the outstanding loan. Alternatively, it could allow your beneficiary to take over the mortgage loan and repay it. To do the second, the bank would need to be comfortable with the beneficiary’s finances after your death. The bank might accept the alternative if your life insurance and other assets provided enough income to pay the mortgage and give your dependents an acceptable income to live on.
Another way to deal with mortgage insurance when you get a mortgage is for you to insure your life for the mortgage’s full value. This would supplement existing regular life insurance coverage. However, this does not look holistically at your finances, so I do not think it is the way to go. You might not need more insurance.
Mortgage life insurance sold by a financial institution can be expensive and has disadvantages. First, the insured amount falls as the mortgage balance drops over the mortgage’s life, but the premium does not fall. Second, unlike a term life policy, the bank has the right to hike premiums. Third, it is not portable. So, if you switch your mortgage, you need to reapply for life insurance with your new bank.
You would be better off to review your financial affairs and if needed, buy extra term insurance from an insurance company. You would own the policy. The financial institution wouldn’t. Your spouse or others you choose, would be the beneficiary, not the bank. And your spouse or dependent would have the choice to take over the mortgage, if that alternative was best for them.
Like all financial decisions, listen, hear, and understand your alternatives, and let the Lord guide your decision.
(C) 2011, Michel A. Bell.
