Mortgage life insurance is basically a reducing term life insurance policy. The concept behind this product is that the death benefit of the policy reduces along with the balance of your mortgage. However, the policy’s premiums do not decrease – they remain level over the term. So, for a 30 year mortgage, your death benefit would decrease annually over that time period, but your premiums wouldn’t. The beneficiary of the policy would be the bank or other institution holding your mortgage.
As premiums for term life insurance policies have decreased over the years, mortgage life insurance policies have fallen out of favor. In most cases, you can now purchase a term life insurance policy with a level death benefit for less than you would pay for a reducing term (mortgage life) insurance policy. You can purchase a term life policy with your spouse or children as the beneficiaries, as opposed to the bank, and if you were to die during the term period, your spouse (or children) would receive the death benefit to do with it as they wish (including paying the mortgage). It’s quite obvious, then, that mortgage life insurance benefits your lender more than it benefits you and your family.
To recap, these are the two main reasons you should consider term life insurance over mortgage insurance:
- Mortgage life insurance is typically more expensive than term life insurance.
- With a term life insurance policy, you can direct where the proceeds will go, whereas with mortgage insurance, the proceeds go to your lender.
Our advice is to purchase enough term life insurance or return of premium life insurance to cover your mortgage in addition to your other bills, burial expenses and living expenses for your family for a period of time.