Mortgage Life Insurance is an often misunderstood concept today due to the many changes in the marketplace over the last 10-15 years. Many people look into this type of insurance when moving/purchasing a new home or refinancing an existing mortgage, in order to provide funds to pay off the mortgage in the event of death of the homeowner(s).
Traditionally, “mortgage life” insurance products (also called decreasing or declining term) provided a reducing death benefit amount but required that you pay a level premium – a premium which did not reduce as the policy coverage reduced. The reductions in the policy face amount were based on a typical mortgage payoff schedule and were not able to be customized to fit any other needs.
Over the last 10-15 years, mortgage interest rates have dropped steadily, prompting most people to refinance their mortgages one or more times. In addition, non-traditional mortgage alternatives such as ARMs, and “interest-only” loans have become more prevalent. As a result, it has become very unattractive to attach an insurance policy to a specific mortgage rather than to a specific individual.
The good news is that over last 10 years, “level term” life insurance policies have dropped very sharply in price. “Level Term” life insurance is an insurance policy that is placed on the life of an individual, and is not connected to a specific mortgage or property. Therefore, the insurance coverage will not be impacted by any future changes (mortgage refinance, moving to another property, etc) and will instead provide the intended benefit in the event the insured should die during the term of the policy. Due to the sharp price drops in this type of insurance over the last decade, the cost of this more flexible type of insurance is actually LOWER than the premiums for mortgage decreasing life policies ever were. Many of these policies also include optional riders that will provide additional benefits in the event of disability of the homeowner.
Term Life Insurance for Mortgage Protection:
Term Life insurance:
- Provides a guaranteed level benefit amount payable for a set number of years
- Provides premiums that do not increase during the term of the policy (10-30 years)
- Allows you the flexibility of reducing your policy benefit if you wish (subject to certain limitations) which will actually lower your premium outlay so you are not paying more for insurance than you end up needing as you go along
- Does not go away or become obsolete if you should refinance , move, or have other changes to your real estate situation
- Can be combined with other coverage needs into a total protection that also provides for income replacement and/or estate planning needs.
In summary, the need for insurance to provide funds to pay off a mortgage in the event of death has not changed – but the product used to accomplish this goal has, and has changed in a way that is more flexible and more attractively priced for consumers than ever before.