Most financial advisers recommend against purchasing mortgage life insurance at any age, unless you can't get a term life insurance policy or the policy premiums are unaffordable. Unlike term life insurance that maintains its value throughout the policy period, the value of a mortgage life insurance policy declines as you make your monthly mortgage payments. Rather than insuring a single liability you might pass on, consider all the liabilities and the lost income your survivors might need to replace and buy insurance that provides funds directly to your beneficiaries rather than to a mortgage company.
Mortgage Life Insurance
Mortgage life insurance insures the loan you take out on your home. If you die while the policy is in effect, the insurance company pays your lender the balance of your loan, excluding any late payments or fees you owe. The term of a mortgage life insurance policy is usually either 15 or 30 years. However, if you're over 50, you most likely won't be able to take out a 30-year policy. For example, State Farm only offers a 30-year policy to people aged 20 to 36 in New York and 20 to 45 in all other states.
Beneficiary of Mortgage Life Insurance
With mortgage life insurance, the beneficiary is the mortgage company, not one of your survivors. Depending on your financial situation when you die, paying off your mortgage might not be the highest priority item for your survivors. However, if you have mortgage life insurance, your survivors don't receive any of the proceeds from the insurance policy and can't determine how to best use the insurance proceeds.
Assessing Life Insurance Needs
When deciding on the kind of life insurance to buy, think more broadly than just your mortgage. Make an assessment of all the liabilities that your spouse and dependents might have and figure the amount of income they might have to replace if you died. Use that information to best determine the kind and amount of life insurance you need. There are online calculators from both nonprofit education groups and insurance companies that help you estimate your insurance needs. Refer to the Resources section for links to calculators from the Life Insurance Foundation for Education and the Prudential Insurance Company.
When Mortgage Life Insurance Is a Good Option
If you are a smoker, if you're obese or if you have diabetes, high blood pressure or another serious medical condition, you may not be able to get a life insurance policy at all, or the rate might not be affordable. In that case, mortgage life insurance might be a good option, or even perhaps your only option, to provide some money to help your survivors when you die. If you purchase a mortgage life insurance policy, It's best not to finance the life insurance with your mortgage because you'll pay interest on the insurance premiums.
Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.