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Beware of Mortgage Life Insurance

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Beware of Mortgage Life Insurance

What is Mortgage Life Insurance?

Mortgage life insurance has become a popular product mainly because it is marketed by mortgage companies, banks and some life insurance agents specializing in that field.

In its purest form, it’s just a life insurance policy where the insurance benefit follows the decreasing amount of debt on one’s mortgage. So, as your mortgage balance goes down, the amount of insurance you have goes down. These have a level premium but decreasing insurance year by year.

These days, these are less popular than level term life insurance for several reasons:You can buy level premium life insurance for 20 or 30 years, with guaranteed premiums without decreases in the life insurance benefit, usually at lower prices than mortgage life insurance. So, why get a policy that decreases in benefit?

  • There are now term life insurance policies called return of premium life insurance that also last 20 or 30 years with guarantee premiums that will guarantee to return all the premiums you paid. Since this is considered a return of your premium and there was no profit, the interpretation is that this refund will be income tax free. Of course, you have to keep the policy to get this and if you don’t you will have paid more than you would have paid for a comparable term life policy.
  • For someone who is confident that they will maintain a policy for the whole time, this option can work very well.Again, if you’re confident that you will keep a policy and your cash flow permits it, whole life or universal life insurance that is either guaranteed to last a lifetime (whole life) or is projected to last for life (universal life) may be an option not only to cover your mortgage in case you die, but to be there for your children no matter how long you live.

By looking into life insurance , you’re taking an important financial step for those you love. The most important thing is to move forward and get the amount you should have so those people are taken care of, usually at least 10 times or up to 20 times your annual income.

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