As with any financial decision, whether or not to buy insurance depends on many factors, such as your income, your marital status, if you have children, your savings and your age. Looking at some of the reasons behind getting mortgage, life or disability insurance may assist you in deciding if the insurance is worth buying.
Private Mortgage Insurance
You may not have a choice about buying private mortgage insurance. If you are buying a home and your down payment is less than 20 percent, your lender may require you to purchase PMI. The important thing to know is that PMI does not protect you. It protects the lender against the possibility of you defaulting on your loan and the lender not being able to sell your house to cover the mortgage balance. If you are required to buy PMI, you may request that your lender cancel the insurance when the balance of your loan drops to 80 percent of your home’s resale value. Your lender is required to cancel the insurance, according to a provision of the Homeowners Protection Act of 1998, when the outstanding loan balance to resale value ratio falls to 78 percent.
Mortgage Life Insurance
Mortgage life insurance is very narrow. This policy will pay off your mortgage if you die, become disabled or become ill and are incapacitated. This insurance is voluntary and you should evaluate your entire financial picture before buying. For example, if you are married with children, it may make more sense for your survivors to use proceeds of regular life insurance to continue paying the monthly mortgage, rather than have mortgage life insurance which offers no alternative but to pay off the mortgage. On the other hand, if you believe your survivors would move -- to be closer to family for instance -- the mortgage will be paid when the house is sold and there is no need for mortgage life insurance. There is a circumstance where buying mortgage life insurance might be appropriate. Mortgage life insurance is usually sold by mail and comes with minimal, if any, health restrictions. If you are not in good health and feel you would not qualify for regular life insurance, or would have to pay exorbitant premiums, mortgage life insurance may provide you with a good alternative for protecting your family. Be sure to read all the small print first.
The main reason to buy life insurance is to provide financial resources for your family if you die. If you have never been married, have no children, have enough savings to pay your outstanding debts and funeral expenses, you may not need life insurance. Alternatively, if you are married with young children, your spouse may need to stay home with them and will need money for everything from daily living expenses to paying for college.
Anything from a broken bone to depression may keep you from your job and you will need an alternative resource for income. Disability insurance will provide that income if you become disabled and are not able to work. While many workers have some disability insurance coverage through their employer, those policies typically do not replace 100 percent of lost income. Additionally, the benefits from employer policies is taxable, meaning you will receive even less money, perhaps at a time when you need even more money because of medical expenses.
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