Insurance is risk management. Therefore, for each type, you need to identify the risk to cover and the best way to do it. Mortgage life insurance, like other types of insurance, can be expensive, so you need to understand that the inherent risk is the same as that of general life insurance. Moreover, there are different ways to achieve it.
Financial institutions sell mortgage life insurance to protect against potential losses upon the death of the mortgagor. Financial institutions, rather than family members or others you choose, benefit from these policies.
Let’s look more closely at how mortgage life insurance may have arisen. If you borrowed $100,000 from a bank to buy a house, the bank would put its name on the title to the property, and thus, become a co-owner up to the value of the loan. This is a typical mortgage.
If you die before repaying the mortgage, the bank will have two options. It can sell the house and give the difference between the sale proceeds and the outstanding loan to your beneficiary. Alternatively, it may allow your beneficiary to take out and repay a mortgage loan. To do the second, the bank has to be comfortable with the beneficiary’s finances after your death. The bank may accept this option if your life insurance and other assets provide enough income to pay the mortgage and an acceptable income for your dependents to live on.
Another way to deal with mortgage insurance when you get a mortgage is to insure your life for the full value of the mortgage. This will supplement the existing regular life insurance coverage. However, it doesn’t reflect on your finances as a whole, so I don’t think it’s the way to go. You may not need as much insurance.
Mortgage life insurance sold by a financial institution can be expensive and have disadvantages. First, the sum insured falls as the mortgage balance falls over the life of the mortgagee, but the premium does not fall. Second, unlike a term life policy, the bank has the right to increase the premium. Third, it is not portable. Therefore, if you switch your mortgage, you will need to reapply for life insurance with your new bank.
It would be better to review your financial affairs and buy additional term insurance from an insurance company, if needed. You will be the owner of the policy. Financial institutions will not. Your spouse or other person you choose will be the beneficiary, not the bank. And your spouse or dependent will have the option of taking over the mortgage, if that option was best for them.
As with all financial decisions, listen, listen and understand your options, and let the Lord guide your decision.
(c) 2011, Michelle A. Bell.