If you're planning to secure your dependents' financial futures by bequeathing them your house, leaving an outstanding mortgage balance when you or your spouse dies could hinder those plans. Disaster mortgage insurance is a financial product that ensures your dependents will inherit your home free and clear by paying off your mortgage if you or your spouse dies. However, Bankrate notes that buying disaster mortgage insurance is not a smart step for every homeowner. While most disaster mortgage insurance policies will cover spousal death, only an in-depth analysis of your finances can determine the right policy for you.
Life Insurance Differences
Disaster mortgage insurance is designed to fill what some homeowners see as a gap in the coverage provided by their life insurance policies. While life insurance will issue a benefit payment to survivors when the policyholder dies, it does not cover the mortgage payment. So, it is possible that survivors will be responsible for a mortgage payment if the homeowner dies.
Spousal Death Coverage
Disaster mortgage insurance policies differ greatly. However, most will cover your mortgage if your spouse dies. If your spouse purchased the disaster mortgage insurance policy, his life is the one covered, so the insurer will pay the mortgage when he passes away. If you purchased the disaster mortgage insurance policy, you may need to cover your spouse by purchasing a rider, which is additional coverage for an additional cost. If you do this, your policy will probably include a clause that states the insurer will only pay one death benefit, so once one spouse dies, the mortgage is paid and the policy is canceled.
Benefits of Disaster Mortgage Insurance
In addition to ensuring that your gift of a home won't come with the burden of a mortgage, most disaster mortgage insurance policies also make your mortgage payments if you lose your job or suffer from poor health. According to Bankrate, purchasing disaster mortgage insurance can be a smart move if you have a risky job or health problems. If these situations apply to you, you'll probably have a hard time being approved for life insurance or your premiums will be pricey. Disaster mortgage insurance policies are typically easier to qualify for and less pricey, so you may find they offer a more practical method of providing death benefits.
Drawbacks of Disaster Mortgage Insurance
Bankrate notes that paying off the mortgage may not be the best way to improve your family's financial health. If you have a relatively small mortgage, for example, choosing a life insurance policy that offers a large cash payment may be more advantageous than choosing disaster mortgage insurance. Also, unlike traditional life insurance policies, disaster mortgage insurance benefits shrink over time. When you purchase your disaster mortgage insurance policy, your benefit amount will be nearly equal to the value of the entire mortgage. Once you've made several mortgage payments over the course of many years, however, your disaster mortgage insurance will only be worth what is left on the mortgage -- a few hundred or thousand dollars.
Miranda Morley is an educator, business consultant and owner of a copywriting/social-media management company. Her work has been featured in the "Boston Literary Magazine," "Subversify Magazine" and "American Builder's Quarterly." Morley has a B.A. in English, political science and international relations. She is completing her M.A. in rhetoric and composition from Purdue University Calumet.