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?