Private mortgage insurance is a fancy name for life insurance. It pays off your mortgage – whatever the balance – if you die. While it sounds spicy, it’s not always a very good deal. Before we dive in, let me be clear the private mortgage insurance is not PMI mortgage insurance – which is also commonly referred to simply as “”mortgage insurance”. PMI benefits your lender. Private mortgage life is supposed to benefit your family.
How does mortgage life insurance work?
The best way to think of mortgage life insurance is that it is term life insurance with a single purpose: to payoff your mortgage in the event of your death.
A mortgage life insurance policy is tied to your mortgage in almost every way. At the time that you take your mortgage, whether on a purchase or refinance, the death benefit on insurance policy is set up to match the amount of your mortgage loan. However, the death benefit will decline as your mortgage is paid down. Once your mortgage is paid off, the life insurance goes away.
In the event of your death, the proceeds of the policy will go right to your lender to payoff the mortgage on your house. But your estate or co-owner will own the house free and clear.
As to the specifics, there are variations depending on which insurance company you use as well as the particulars in your situation. It’s also important to remember that while a lender may recommend that you get mortgage life insurance, you are not required to get it. It is strictly optional coverage.
Benefits of mortgage life insurance
Few things can give you the peace of mind that comes from knowing that your mortgage will be paid off at the time of your death. That means that your dependents will be able to continue to live in a mortgage-free home for as long as they wish. The fact that mortgage life insurance is specifically tied to the path of your mortgage also guarantees that that will be the outcome if that is what you wish to happen. There’s no chance that the money will be spent on something different.
Another advantage is that the underwriting guidelines for mortgage life insurance are often more lenient than they are for other types of life insurance. So this is one way to get life insurance if you have bad health. If you’re unable to get a sufficient amount of insurance to cover all of your final wishes, you can probably get a mortgage life insurance policy, and supplement that with as much coverage as you can get elsewhere.
The negative side of bank mortgage insurance
Mortgage life insurance isn’t very popular and it has more than a few detractors. For one thing, the premium payments typically remain constant even though your death benefit drops. What seemed like a bargain when you first took the insurance, and your mortgage, becomes less so as the loan balance and the insurance death benefit drop.
Another concern is that the insurance benefit will be payable to your lender upon your death, not to your dependents. That limits the desirability of having this type of insurance. While it may be good to have your mortgage paid off upon your death, your dependents may have other, more pressing concerns. They will not be able to address those concerns with a mortgage life insurance policy.
Is it worth having?
For most people mortgage life insurance shouldn’t be necessary. You can instead take the largest term life insurance policy you can afford and use part of the proceeds to payoff the mortgage on your home at your death, if that’s what you and your survivors agree upon. However your dependents will not be locked into paying off the mortgage, should they decide against doing so.
A straight term life insurance policy give them the flexibility to allocate the money wherever it’s most needed. Maybe that’s the mortgage, and maybe it’s not, but they’ll have that option.
If you don’t have a whole lot of confidence that your survivors will allocate the life insurance proceeds wisely, then mortgage life insurance can be a consideration. Since the proceeds will be allocated directly to payoff the mortgage event of your death, you will be able to know that it will happen as you wish. Your survivors might still blow through other insurance proceeds, but at least you can know that the mortgage on a house will be paid for.
Do you have mortgage life insurance? If so, why?