You have just been approved for a mortgage and you begin to think about your insurance options. What coverage does mortgage life insurance provide? Does term insurance meet your needs?
Theres no right, or wrong, answer when deciding on whether to get Mortgage life insurance, or Term insurance. Making the decision about what coverage works best for you, begins with having a solid understanding of how this type of coverage actually works.
Mortgage life insurance, also known as creditor insurance, is a policy sold by your mortgage company, broker, or bank. In the event of death, a lump sum payment is then paid directly to your lender (not a named beneficiary). Therefore, your mortgage is paid off. Keep in mind that most of these policies are capped at $500,000; if your mortgage is higher than that amount and you decide to get mortgage life insurance, you may need to supplement your policy, or take advantage of a different life insurance product all together. Also, mortgage life insurance is a declining insurance benefit. This means that only the balance of your mortgage is paid directly to your lender, not the amount requested at the initial application.
Consider the following example: Your mortgage was $450,000 at the time you applied for insurance and you passed away several years later. If your mortgage balance was $250,000, your death benefit would only pay-out $250,000. Instead, with a term insurance policy, you would receive the full $450,000. So naturally you ask yourself; should I take mortgage life insurance policy, or a term insurance policy?
To help you decide, weve outlined the most noticeable differences:
1) Mortgage life insurance, or creditor insurance, is a less invasive application process that usually comes with 3-5 questions; it is offered at the time you sign your mortgage documents. The entire application can be completed in as little as 5 minutes; generally, it provides a good fit without having to go through a full medical exam that could include blood work and possibly other additional tests. Therefore, if youre hesitant about needles and about someone looking into your medical matters, this mortgage insurance may be just the right product for you.
2) Term insurance could be a more suitable long term solution, and offer better protection if taken for the right length of time. Youll notice that in our example provided above, term insurance would pay out the full amount that was requested at the initial application of the mortgage; mortgage life insurance would only pay your remaining balance, directly to your lender. In other words, term insurance is not a declining insurance benefit. However, the costs for term insurance can vary drastically between terms (5, 10, 15, 20 etc.) and even more so, if you have a pre-existing medical condition that your insurance company deems high risk. The application for term insurance is much more vigorous than the application for mortgage insurance. Typically, the application process for term insurance includes questions about your health and requires you to complete a full medical exam.
3) Term life insurance allows you to choose your beneficiary (i.e. spouse, child, parent, business partner). Mortgage insurance requires you to choose your mortgage lender as the named beneficiary.
4) Both policies offer great piece of mind. If taken at an early age, they may cost you as little as a cup of coffee per day and provide you with ample coverage– well worth the security!
There are many other features for both types of products. However, both options should be discussed with a licensed insurance professional prior to finalizing your mortgage. The good news is that coverage is accessible. For more information, visit us at www.DoYourOwnMortgage.com
Lionel Khoury AMP
**This blog is not an endorsement for any insurance product or insurance company nor does it recommend one over the other.