Mortgage life insurance in insurance that pays off your mortgage (whatever the balance is) if you kick the bucket. It sounds pretty cool on the face of it; who wouldn’t want to leave their family with a home that’s free and clear of debt if they die? So yes, it sounds good. Even better, it feels good. But is buying this coverage really a good idea?
Before we go deeper, I want to point out a couple of things about this kind of insurance.
First, your premiums usually stay the same while your coverage usually decreases (as you pay down the mortgage). Of course you have to inspect the policy carefully to determine what happens if you refinance etc. But in most cases, your coverage declines to cover the declining balance of your mortgage.
Often this kind of insurance is expensive and it’s something that is pushed on people. That’s not always the case, but it often is in my experience. Life insurance is a financial tool. You should think about it in terms of your overall situation – not just the mortgage. Depending on your age, family and financial situation, you may not need. Or, you may need term insurance and not specifically mortgage protection insurance. A good agent will always look at your overall situation before trying to shove this down your throat. So if you are talking to someone who wants to cram this insurance to you rather than first get to know your needs, just talk to someone else.
OK. Let’s take a closer look at mortgage protection life insurance by going through an email exchange I recently had with another Pilgrim (we’ll call her S):
My husband’s term insurance is about to run out. He turns 70 in a couple of weeks, so the rates will be high. We owe $70,000 on our mortgage and both deal with high blood pressure. I had breast cancer two years ago, but am very healthy now. Should we buy mortgage life insurance?
It’s a simple question – but impossible to answer without getting more information.
Specifically, here are the questions I asked:
a. Why do you need insurance now? Just to pay off the house?
b. Do you have any debts?
c. Are you or your husband retiring soon?
d. What are your sources of income?
It turned out that the couple has no debt (other than the mortgage); her husband retired more than five years ago; and she is retiring next month. The couple can live comfortably on Social Security, a pension and investment income.
We exchanged e-mails and it turned out that S was anxious to get an answer about the life insurance. Her husband’s birthday was coming up and she wanted to get the insurance in case she needed it before the premium went up any further.
I told her that of course she could apply for the coverage even though I’m not a huge fan of this type of policy. It’s very similar to guaranteed issue term life insurance, which I don’t usually endorse either. But she could always cancel the policy once she and her husband were approved if she decided she didn’t need it later.
In that same e-mail, I asked more questions. There was one thing that was puzzling me. They really didn’t have all that much debt left to pay and I knew the premiums would be high for this kind of insurance. Did they need the insurance? I couldn’t see why.
I figured, since they had enough income to live and pay the mortgage, why buy the insurance? It’s not easy to get life insurance as you age.
The one risk this couple has is if ONE of them dies, resulting in a decrease in income. I didn’t have all the information I needed but in that case, insurance could be a solution – but barring that, I just didn’t see the need. You follow me? If they either one would have enough to pay the bills and keep the house (if that’s what they want), why pay those premiums?
In the end, the couple decided to skip the insurance and simply use the money they would have paid for the insurance and apply that towards paying down the mortgage. I believe it was a smart decision for these people. Of course, it could be different for you.
Here are the takeaways:
1. Slow down.
At first, S was gung-ho to buy the coverage. She didn’t really think about the cost-benefit of the proposition. She needed to slow down to use her intellect instead of her emotions.
2. Determine if you really need coverage or not. And if so, what is the real exposure?
Does the couple have enough passive income to pay the mortgage even if one were to die? I don’t really know, but I’ll assume they do. They don’t have any debt, which means they live within their means. Also, the mortgage balance is low. They also have investments that theoretically could be liquidated in an emergency and used to pay off the mortgage.
3. Get quotes.
Based on this couple’s health history, they might find it difficult to obtain reasonable coverage (if they needed it).
If life insurance is a part of your family continuation plan, I strongly suggest you get some quotes NOW while you are healthy. As I wrote about recently, term life insurance quotes have dropped like a rock recently. Even if you already have coverage, I strongly recommend that you get a term insurance quote now to make sure you have the lowest-cost coverage. And make sure you look at life insurance in your overall financial situation – not just as it applies to your mortgage.
4. Review investments.
I didn’t get into this with S, but the key for this couple is making sure their investments are structured correctly in order to generate the retirement income they need, provide a hedge against inflation and shield them against undue risk.
I’ve written about this extensively. In addition, since this is the central issue, I strongly recommend consulting with a professional financial advisor. This isn’t a plug for my services. If S has a good advisor, she should consult her. If she doesn’t have a good advisor…well…yes…she could call me. (OOOPS…I suppose that was a plug…)
Does your retirement plan call for paying off your house when you retire? Even if it doesn’t, will you need life insurance after you retire? Why? Does mortgage protection make sense for you? Why or why not?
Paul says
A lot of great points there Neal, I have a friend who is on the house hunt and will be using a mortgage to pay for it and so comes mortgage protection insurance that banks demand so you get the mortgage. Is this the case with all banks or is there a way around it while still protecting yourself for the future?
Jason says
Interesting. Sounds like they made the right choice. Insurance is not for ever situation, and it sounds like they have theirs well under control. My thought would be to not pay down the mortgage, but rather save the extra cash flow, perhaps re-invest it elsewhere, and keep some amount of liquidity. There are other concerns on the road ahead, such as long term care situations, other health care situations, or even legacy items if there is family they wish to leave something for. Paying down the mortgage further will not have much of a long term help for them at this point.
Panda Mike says
Banks will usually try to sell you mortgage insurance but you are often better off with a combination of a 10 years and 20 years term life insurance. It will be cheaper and you will get the full amount instead of having your mortgage paid off.
Bryan says
@Pilgrim – Has “S” looked into a Reverse Mortgage? At their age, and life stage, it makes little sense to continue paying a mortgage payment each month. I would suggest they seek the advice of a qualified Reverse Mortgage Adviser to see if that option would make sense for their situation.
@Odysseus – Nunzio is 100% correct “applying while your healthy and premiums are low before you think you actually need the coverage is one of the smartest things you can proactively do”.
Some day you will probably need it so why not apply when your young and healthy to keep your premiums low? Plus…there are some great insurance plans out there with incredible asset accumulation programs built in that can help you reach all your financial goals and provide a means for you to deal with all the things “life” will eventually confront you with.
Neal says
Bryan……smart insights. YES….the reverse mortgage could be an option…depending on the situation. W/rates low and this couple young, I don’t imagine it working but it might if interest rates rise and once they are older.
Nunzio — As always, helpful and intelligent remarks. If you are pretty sure you w/need it…get it now. I bought my policies once I had kids because, even though I needed prior, I didn’t FEEL it like I did once my kids were here.
Odysseus — The insurance companies certainly have a vested interest in selling insurance. Having said that, I meet more people who don’t have enough coverage rather than meeting people who have too much. FWIW.
Bryan says
Neal – If the husband is turning 70 and the wife is older than 62, they could probably get a Reverse Mortgage with a lump-sum distribution to at least cover the balance on the existing mortgage, and, depending on the value of their house and her age, they can get a line of credit (HECM) which they can access in the event of an emergency or the death of the husband, OR receive monthly installments for the rest of their lives to supplement any potential loss of income. It’s worth investigating.
OdysseusToday says
I am young, 25, and at the other end of this spectrum concerning insurance, but I had an awakening that the more I read and listen to podcast the more I realize most people do not understand the role of insurance.
Insurance is only useful as long as you do not have the resources to take care of the problem without that insurance. I have heard several people asking about life insurance in recent podcast and the advisers keep asking them if they have enough $$$ to cover all the expenses/debts if they die. If they say yes, or have no debts then the life insurance premiums can go somewhere else (retirement accounts, savings, etc).
I could have the information backwards, but it appeared to be what advisers were recommending as I understood it.
Great Post!
Nunzio Bruno says
That was a really great breakdown. Insurance coverage is one of those areas of financial planning that people still don’t really have an understanding of or they have had bad experiences with so there info is jaded. The biggest take aways here are the needs to slow down and evaluate your situation and to apply young!! As a coach and a planner I don’t have affiliations so there are no incentives for me to “push” life insurance but applying while your healthy and premiums are low before you think you actually need the coverage is one of the smartest things you can proactively do. And consequentially one of the hardest to get people to see..