Who Should Get Mortgage Protection Insurance?
When you are looking for a new home, you will receive mortgage protection insurance offers. This type of life insurance is designed for homeowners, and at first glance, such coverage may seem right. After all, don’t we want your family to have a roof over their heads after you die?
This fear, while very valid, doesn’t mean you should pull the trigger when buying mortgage protection insurance – here’s what you need to know about it and whether it’s worth it for you.
What is mortgage protection insurance?
Mortgage protection insurance is designed to pay off a mortgage with a mortgage company in case you are unable to pay it off on your own. This means that if you die with outstanding loans, your insurance company will pay the rest of the balance directly to your lender, allowing your family to continue living in your home without having to worry about making the remaining payments.
Unlike homeowners insurance, mortgage protection insurance acts as a type of life or disability insurance. More accurately, it can be described as a “mortgage life insurance policy.” An optional purchase with a mortgage may seem like a smart move for your peace of mind, but it may not be the wisest financial decision.
The key difference between mortgage protection and life insurance
Mortgage protection insurance and traditional life insurance have several differences in premiums, acceptance rates and rules. In particular, you will find that term life insurance is more affordable than mortgage protection insurance offers. But for most buyers, the key difference is what happens to the money when you die.
The beneficiary of mortgage protection insurance is your mortgage company, not your family. Compared to a typical term life insurance policy, your family cannot see the money for themselves as it goes straight to your creditor.
Why mortgage protection insurance may be right for you
For some homeowners, it makes sense to ensure that your money goes directly to the mortgage company and not to your family members. If you think your family won’t be able to properly schedule your insurance payment, mortgage protection insurance ensures that your mortgage will be paid and your family will not be kicked out of your home.
For most, term life insurance is best.
On the other hand, mortgage protection insurance means that your family cannot use this insurance payment to cover other expenses such as bills, taxes, or funeral expenses. In addition, according to Bankrate , term life insurance typically offers broader coverage, greater flexibility, and lower cost.
For most, it makes more sense to buy a fixed amount of coverage through term life insurance that is higher than the amount needed to pay off a mortgage. Since your family is the beneficiary of term insurance, they can do whatever they want with the money, including paying off the mortgage. Typically, mortgage protection insurance rigidity is required only when traditional forms of life or disability insurance are not available, either due to premium costs or approval restrictions.
Bottom line: You’ll probably want to forego mortgage protection insurance and look for similar coverage with a sufficient life insurance policy .