Why You Need Life Insurance if You Have a Mortgage | Best Policies & Tips

 If you have a mortgage, you may have heard of mortgage protection insurance. This is a type of life insurance that pays off your mortgage debt if you die. While this may sound like a good idea, it may not be the best option for you and your family. In this article, we will explain why you need life insurance if you have a mortgage and what are the alternatives to mortgage protection insurance.

Mortgage Protection Insurance: How It Works

Mortgage protection insurance (also called mortgage life insurance or mortgage protection life insurance) is a policy that pays off the balance of your mortgage if you die during the term of the policy. The term of the policy usually matches the term of your mortgage, such as 15, 20, or 30 years. The premium of the policy is usually fixed and based on your age, health, and mortgage amount. The death benefit of the policy is usually equal to your mortgage balance at the time of your death and decreases as you pay off your mortgage. The beneficiary of the policy is usually your mortgage lender, not your spouse or other person you choose.

Mortgage protection insurance can help you pay off your mortgage debt if you die and prevent your family from losing their home. This can provide peace of mind and financial security for you and your loved ones, especially if you have a large mortgage balance, a high interest rate, a long repayment period, or other financial obligations.

For example, suppose you have a $300,000 mortgage with a 30-year term and a 4% interest rate. You buy a mortgage protection insurance policy that costs $50 per month and pays off your mortgage if you die. If you die after 10 years, the policy will pay off your remaining mortgage balance of $239,000 and your family will own the home free and clear. If you die after 20 years, the policy will pay off your remaining mortgage balance of $143,000 and your family will own the home free and clear.

Mortgage Protection Insurance: Pros and Cons

Mortgage protection insurance has some pros and cons that you should consider before buying it. Some of the pros are:

• Easy application process: Mortgage protection insurance is usually easy to apply for and does not require a medical exam or a blood test. You may only need to answer a few health questions and provide some basic information about yourself and your mortgage.
• Low underwriting requirements: Mortgage protection insurance is usually available to most people regardless of their health status or medical history. You may qualify for coverage even if you have pre-existing conditions or high-risk hobbies.
• Guaranteed payout: Mortgage protection insurance guarantees that your mortgage will be paid off if you die during the term of the policy. You do not have to worry about market fluctuations, interest rates, or inflation affecting your coverage.

Some of the cons are:

• Decreasing value: Mortgage protection insurance decreases in value as you pay off your mortgage. This means that you are paying the same premium for less coverage over time. You may end up paying more than what your policy is worth.
• Lack of flexibility: Mortgage protection insurance does not allow you to change your premium payments, death benefit amount, or beneficiary. You are locked into a contract that may not suit your changing needs and preferences.
• Limited coverage: Mortgage protection insurance only covers your mortgage debt and nothing else. It does not provide any other financial benefits to your family, such as income replacement, education expenses, funeral costs, etc.

For example, suppose you have a $300,000 mortgage with a 30-year term and a 4% interest rate. You buy a mortgage protection insurance policy that costs $50 per month and pays off your mortgage if you die. If you die after 10 years, the policy will pay off your remaining mortgage balance of $239,000 but nothing else. Your family will still have to pay for other expenses such as taxes, utilities, maintenance, etc. If you die after 20 years, the policy will pay off your remaining mortgage balance of $143,000 but nothing else. Your family will still have to pay for other expenses such as taxes, utilities, maintenance, etc.

Life Insurance: A Better Alternative

Life insurance is a policy that pays a lump sum of money to your chosen beneficiary if you die during the term of the policy. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a specified period of time, such as 10, 20, or 30 years. Permanent life insurance provides coverage for your entire life and also has a cash value component that grows over time.

Life insurance can help you pay off your mortgage debt and provide other financial benefits to your family if you die. Some of the benefits are:

• More coverage: Life insurance can provide more coverage than mortgage protection insurance. You can choose the amount of coverage that suits your needs and goals, such as enough to pay off your mortgage, replace your income, cover your debts, fund your children’s education, etc.
• More flexibility: Life insurance can provide more flexibility than mortgage protection insurance. You can change your premium payments, death benefit amount, or beneficiary as long as you meet the policy requirements. You can also access your cash value through loans or withdrawals if you have a permanent life insurance policy.
• More control: Life insurance can provide more control than mortgage protection insurance. You can choose your beneficiary and how they use the death benefit. You can also choose your policy type and features that match your risk profile and financial goals.

For example, suppose you have a $300,000 mortgage with a 30-year term and a 4% interest rate. You buy a term life insurance policy that costs $30 per month and pays $500,000 if you die. If you die after 10 years, your beneficiary will receive $500,000 and can use it to pay off your remaining mortgage balance of $239,000 and have $261,000 left for other purposes. If you die after 20 years, your beneficiary will receive $500,000 and can use it to pay off your remaining mortgage balance of $143,000 and have $357,000 left for other purposes.

How to Choose the Right Life Insurance Policy for Your Mortgage

If you decide to buy life insurance instead of mortgage protection insurance, you need to choose the right policy for your mortgage and your family’s needs. Here are some tips and guidelines on how to do that:

• Compare different types of life insurance policies: Term life insurance is usually cheaper and simpler than permanent life insurance, but it only provides coverage for a limited time. Permanent life insurance is usually more expensive and complex than term life insurance, but it provides coverage for your entire life and has a cash value component. You need to weigh the pros and cons of each type and decide which one suits your budget, goals, and preferences.
• Compare different amounts of life insurance coverage: You need to choose an amount of coverage that is enough to pay off your mortgage and provide other financial benefits to your family. You can use online calculators or formulas to estimate how much coverage you need based on your income, expenses, debts, assets, etc. You also need to consider inflation, interest rates, and other factors that may affect your future needs.
• Compare different terms of life insurance policies: You need to choose a term that matches the term of your mortgage or longer. If you choose a shorter term, you may end up without coverage when you still have a mortgage balance. If you choose a longer term, you may end up paying more premiums than necessary. You also need to consider your age, health, and life expectancy when choosing a term.
• Compare different prices of life insurance policies: You need to choose a price that fits your budget and offers the best value for your money. You can compare prices from different life insurance companies and products online or through agents or brokers. You also need to consider the factors that affect the price of life insurance policies, such as your age, health, lifestyle, occupation, etc.

To help you find and buy the best life insurance policy for your mortgage, you can use online tools like NerdWallet or Investopedia to get quotes from multiple companies and compare their features, benefits, prices, and ratings. You can also contact agents or brokers who can offer you personalized advice and recommendations based on your needs and goals.

Conclusion

Having a mortgage is a big financial responsibility that can affect your family’s future if you die. That’s why you need life insurance if you have a mortgage. Life insurance can help you pay off your mortgage debt and provide other financial benefits to your family if you die.

However, not all life insurance policies are created equal. Mortgage protection insurance is a type of life insurance that pays off your mortgage if you die, but it has some drawbacks, such as decreasing value, lack of flexibility, and limited coverage. Life insurance is a better alternative than mortgage protection insurance, as it offers more coverage, more flexibility, and more control.

Choosing the right life insurance policy for your mortgage is not easy, but it is not impossible either. You just need to compare different types of, amounts of, terms of, and prices of life insurance policies and find the one that suits your needs, goals, budget, and preferences. You can also use online tools or contact agents or brokers to help you with this process.

Remember, the best life insurance policy for you is the one that meets your needs, goals, budget, and preferences. So don’t delay and get started today!