News for Pilots

Understanding Mortgage Life Insurance
02-01-2005

If you have a mortgage, chances are you’ve heard a pitch for mortgage life insurance. You’re being offered the chance to buy an insurance policy that will repay your mortgage in the event of your death. This offer, typically by mail, comes from your lender or an insurance company affiliated with that lender. It may include a letter from your lender recommending that you buy a policy. The insurance itself, however, is sold by insurance companies. Although called mortgage insurance, it is really a type of term life insurance where the amount of coverage decreases as the principal balance declines, typically called “decreasing term life insurance”. In the event the borrower dies while the policy is in force, the insurance company will pay off your mortgage. You should note, however, that the premiums for this coverage do not reduce as the policy’s benefit decreases.

How a decreasing term policy is used to insure your mortgage
The decreasing term policy begins with a death benefit that is equal to your current mortgage balance.
• The death benefit decreases at the same rate as your mortgage balance
• The premium payments never change but may stop prior to the loan payment
• Your lender may agree to add the premium payments to your monthly mortgage payment

Understanding Mortgage Life Insurance
With mortgage life insurance you simply receive a certificate referring to a master insurance contract, which outlines the specific benefits and cost. This means that coverage is not guaranteed and all policyholders can be cancelled by the insurance company or the lending institution at any time.

Additionally, mortgage insurance purchased through the lending institution is not portable. If you sell your home and buy another or simply renegotiate your mortgage you will have to qualify again for mortgage insurance and, like other types of life insurance, the older you are the more expensive the coverage will be. Most homebuyers today do not live in the same house for their entire lives and the likelihood is that subsequent homes will be more expensive.

When you purchase mortgage insurance coverage from a lending institution, your only choice of beneficiary is the lending institution. It may not make sense to automatically have the lending institution pay off a low interest rate mortgage. When you purchase individual coverage from a life insurance company, the benefit is paid upon death to your choice of beneficiary, usually your spouse. Having the money in hand gives them the choice of whether to pay off the mortgage or invest the money to produce income to cover other living expenses and continue making the mortgage payment.

The market for individual life insurance is extremely competitive and you can shop among companies. When you buy a mortgage life insurance policy through your lender you have no opportunity to shop. The upshot is that a mortgage insurance policy will probably cost more then a term life insurance policy taken out on your own.

Mortgage life insurance is purely voluntary, however, so the question is, should you buy?
Generally, the answer is no.

All things considered, an independent life insurance broker is your best choice to help you find the right kind of life insurance for your needs; you will get experienced advice from someone who specializes in life insurance products.

Is there ever a situation where mortgage life insurance might make sense? Contrary to some insurance agents, the answer is yes.

Since mortgage term life insurance is usually mass marketed by lending institutions as a form of group insurance, using life insurance companies to underwrite the risk, the health standards you must meet to qualify are usually much lower then for a personal life insurance policy. (There has been some suggestion though that a more thorough review for your application takes place at the time of death for the purpose of finding undisclosed medical history which may allow the insurance company to void paying the claim.)

Additionally, mortgage insurance purchased by a cigarette smoker appears to be a better deal than life insurance purchased directly through an insurance company. This is because the lending institution’s group insurance premiums are a blended smoker/non-smoker rate. They are the same whether a person is a tobacco user or not. A non-tobacco using person will inevitably find a lower premium by using the services of a life insurance broker.

Some life insurance companies view cigar, pipe and chew consumers as non-tobacco users. Even more reason to consult with an independent life insurance broker.

So if you are in poor health and a heavy cigarette smoker you may want to consider mortgage life insurance through your financial institution.

Even then check the policy’s fine print for restrictions or limitations.

Barring this scenario, it rarely makes sense to buy life insurance for narrow reasons, in this case to pay off your mortgage. Planning for your death is a good idea, but the life insurance decision should be based on your family’s total needs, not just the mortgage.

With an individual life insurance policy your loved ones can use the money (life insurance proceeds are usually paid tax free to the beneficiary) for whatever they need. Whether it’s to cover everyday expenses, pay off high-interest debt, establish a college fund, provide for your spouse's retirement or pay your last medical bills. They could use the money to pay off the mortgage but, with interest rates low it might not make financial sense.

Buying a home it is a good time to reassess your life insurance needs. To figure out how much life insurance you need visit our “Assess Your Life Insurance Needs” calculator. Once you’ve determined the amount click on “Get A Life Insurance Quote” for an independent, no obligation individual life insurance quote.