Buying a home is probably one of the biggest purchases you’ll ever make. In fact, it’s such a large financial commitment that unless you’re sitting on a giant mountain of cash, you won’t be shelling out money for your home just on the day you buy it. Instead, you’ll probably be paying for it over several years or even decades in the form of mortgage payments.
Photo credit Jessica Bryant
That’s what can make mortgage protection insurance seem so attractive when your bank or mortgage broker tries to sell it to you.
Mortgage protection insurance ensures that there will be money to cover your remaining mortgage payments in case you die and your income disappears. So even though you may pass on insurance when you book flights or buy concert tickets, you may think buying mortgage protection insurance is a no-brainer. After all, you don’t want your family to have to worry about paying the monthly insurance premiums on their own. So passing on mortgage protection insurance may seem risky—and even downright foolish.
But is mortgage protection insurance really the best way to protect your family from mortgage debt?
Keep reading below to find out why it’s not the type of coverage we typically recommend (and what you should get instead).
What is mortgage protection insurance?
Mortgage protection insurance is protection that covers your remaining mortgage payments if you die. It ensures that your family won’t be burdened with mortgage payments on top of all the other expenses they now have to cover without the help of your income. And if they wouldn’t be able to pay the monthly premiums without your income, it helps them stay in your home (if they want to).
In terms of the basics, mortgage life insurance is similar to standard life insurance: you buy a policy, you pay monthly premiums, and a death benefit gets paid out if you die while holding the policy.
But as you’ll see below, this is where the similarities end.
The pros of mortgage protection insurance
In school, you probably learned that you should always highlight someone’s strengths before identifying their limitations. So before we talk about the cons of mortgage protection insurance, let’s give credit where credit is due and discuss the pros.
Provides dedicated protection for your mortgage
One benefit of mortgage protection insurance is that it provides dedicated coverage for your mortgage. This means that if you die, there’s no question about how the money paid out in your death benefit needs to be used. The money will go straight to your bank.
In a way, this makes paying off your mortgage easy for your family. They won’t have to worry about setting up monthly pre-authorized payments or properly allocating a portion of a larger sum of money to paying off the mortgage. And because your coverage amount will be matched to your mortgage balance, you know there will be enough money to pay off any outstanding debt.
Easier to qualify for
The underwriting process is usually less stringent for mortgage protection insurance than for standard life insurance. As a result, you’ll end up paying higher premiums to compensate for the fact that your insurer doesn’t know how much they’re playing Russian roulette to cover you.
But if you have an existing medical condition that would make it difficult or extremely expensive to qualify for standard life insurance, mortgage protection insurance can be a good way to get coverage for your mortgage.
The cons of mortgage protection insurance
Even though mortgage protection insurance looks like standard life insurance on the surface and has some benefits, it’s important to know the cons.
Here are the most important ones:
Your bank is the beneficiary
When you buy mortgage protection insurance, your beneficiary isn’t your family. It’s the bank—yes, the institution that’s been taking your money all your life.
So although mortgage protection insurance shields your family from mortgage debt, they won’t actually see any of the money if your death benefit gets paid out. It’ll all go straight to your bank.
It covers your mortgage only
Mortgage protection insurance is also narrow in scope because the death benefit has to be used to pay off your mortgage. Even if the money didn’t go straight to your bank, your family wouldn’t be able to use it to cover other costs, like school tuition or daily expenses.
It provides limited flexibility
As we’ve mentioned, with mortgage protection insurance, you can’t choose your beneficiary and your family can’t choose how your death benefit is spent. But believe it or not, mortgage protection insurance limits you in other ways too.
In particular, with mortgage protection insurance, you’re usually locked into a policy length that matches the length of your mortgage. And if you’re above a certain age, you may be limited to a shorter policy length.
It’s more expensive
We also told you earlier that mortgage protection insurance tends to be more expensive than standard life insurance because your insurer doesn’t know as much about how risky you are to insure. And to compensate for this, they charge you higher monthly premiums.
Unless you have an existing medical condition that would make it tough to get standard life insurance, paying higher premiums for less stringent underwriting isn’t worth it.
That’s not even the worst part, though. With mortgage protection insurance, your death benefit decreases in value as you pay off your mortgage. But your premiums stay the same. This means that over time, you get less and less for what you pay for. Those sneaky banks!
You can’t transfer your policy if you switch banks
If you switch banks while holding your mortgage, you won’t be able to transfer your mortgage protection insurance policy to your new bank. Instead, you’ll have to reapply. And because you’ll be older (and possibly less healthy) than when you bought your first policy, you’ll probably end up paying higher rates for a new one.
Term life insurance: the better alternative to mortgage protection insurance
Because mortgage protection insurance comes with lots of restrictions and a hefty price tag, we typically recommend steering clear of it.
But then how do you protect your family against mortgage debt? With term life insurance.
When you buy term life insurance, you can choose a coverage amount and policy length that matches the amount of debt you have and the number of years you expect to have it for. If you die during the term of your policy, your beneficiary gets a tax-free lump sum that matches your policy coverage amount.
Unlike with mortgage protection insurance, you can choose your beneficiary, and they can use the money in any way they’d like. You can also select a coverage amount that will cover your mortgage plus any other debts or expenses you don’t want your family to get stuck with.
In addition, when you choose term life insurance over mortgage protection insurance, you’ll typically pay lower premiums, your death benefit won’t decrease over time, and you won’t have to go through the headache of reapplying for a policy if you switch banks while holding your mortgage. Seems like a better deal, right?
The verdict: Mortgage protection insurance (usually) isn’t worth it
Most people say that they would do anything for love. So if you can get on board with the idea of peeing in a cup to protect your family, term life insurance is usually your best bet. It’s generally more affordable and flexible than mortgage protection insurance. And if you’d like, it can provide more comprehensive protection too.
This is a sponsored collaboration between ADDICTED Media Inc and PolicyMe.