Disadvantages of Mortgage Life Insurance: Why Term is better

If you are in the market to buy a home or already have a mortgage account, you are probably looking for ways to protect your loved ones from future mortgage debt, in the event of your death. The most common options are mortgage life insurance policy and term life insurance.

Term life insurance
A term life policy is an insurance policy that you independently take out with a life insurance company, with the idea that a part or all of the proceeds be used to pay off your mortgage. You name a beneficiary, usually your dependants, who are instructed to use the money to settle your mortgage account. Your beneficiaries can retain any left over amounts.

Mortgage life insurance
A mortgage life insurance policy is not offered by a life insurance company, but by banks and other financial institutions that have your mortgage. The financial institution is the beneficiary, and the product is designed to have level premiums with decreasing death benefits. Usually mortgage life insurance doesn’t require a medical exam.

Disadvantages of mortgage life insurance
– Mortgage life insurance coverage decreases with time:
The amount of cover decreases in parallel with the amount outstanding on your mortgage. However, your premiums remain level, and you end up paying more for less coverage over the years. Of course, the way it is designed, you don’t receive any benefits on it if you outlive the term. The bank retains any left over amount.
– A minimum stipulated time period to qualify for a payout:
Usually, mortgage insurance doesn’t payout in the first six months of the policy. That exposes the mortgagor to a lot of risk.
– Excludes pre-existing medical conditions:
Though mortgage life insurance doesn’t require a medical exam to determine premium rates, any pre-existing medical conditions are excluded from the policy.
– If you wish to refinance, you need to take out a fresh mortgage policy
If you decide to refinance, your existing mortgage life policy ceases, you will have to take out a fresh policy. This can prove to be quite a bit of extra trouble.
Why term life insurance is better
– Term life is more affordable:
Because the underwriting process in mortgage term life insurance is not as precise as that of a term life insurance policy, the premiums can be quite high for mortgage life insurance. Term life is generally more affordable, with its economical premiums.
– Death benefits in term life go to the insured’s beneficiaries:
When you use a term life policy to cover your mortgage dues, your beneficiaries are in total control of the money. If you die many years into your term policy, your mortgage dues would have gone down considerably, which means that your beneficiaries get to retain any leftover cash.
– Term offers a choice of policy formats:
While mortgage life insurance has a decreasing term format, with term life you can opt for either decreasing term insurance or level term insurance. A decreasing term insurance policy will provide your beneficiaries with only enough money to clear your mortgage. A level term insurance policy on the other hand has a fixed death benefit amount, and therefore can be used to clear off more than just your mortgage amounts. For higher premiums you can also add more protection for other reasons, such as to replace your income, take care of your kids’ college fees, etc.
– Doesn’t require a fresh policy if you decide to change
As mentioned earlier, if you decide to refinance, your mortgage life insurance policy ceases. However, with term, even if the underwriting process requires your mortgage documents, the life insurance can’t be revoked each time the structure of your finances change.
Make sure you are covered adequately
When you use a term life policy to cover your mortgage, remember that you need to take out additional term life insurance to cover your other financial obligations in the event of your death. Look at riders such as critical illness and disability to cover every possibility.

Life is uncertain. With the right mortgage life cover coupled with comprehensive life insurance planning, you can be sure that your loved ones are taken care of when you are no longer around to provide for them.

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