In theory, mortgage life insurance sounds like a good deal. When you buy this type of coverage, you have a guarantee your mortgage will be paid off in the event of your death.
If you worry your spouse might struggle to keep up with payments, mortgage protection insurance is a great way to buy some peace of mind. While your family might struggle in other ways due to your death, you could rest assured they had a paid-off home at the very least.
5 Ways Mortgage Life Insurance Is a Raw Deal
Still, it's important to note that mortgage life insurance is one of the least efficient ways to protect your family financially. Here are a few of the ways mortgage life insurance comes up short, plus a smart alternative to consider in its place.
Mortgage protection insurance is expensive
Mortgage life insurance can vary depending on the provider, but it might cost more than you think. At State Farm, for example, $100,000 in mortgage protection coverage starts at $258 per year on a thirty-year loan. If you paid the policy during the life of your mortgage, you would fork over $7,740 during that time. No matter how you cut it, that's a lot of money for severely limited coverage that actually decreases in value every year. More on that in a minute.
You may be able to buy more life insurance coverage for less money
If your goal is protecting your heirs in the event of your death, buying an inexpensive term life insurance policy might leave you better off. Not only is term life insurance fairly cheap comparatively, but coverage limits may be more generous. Using State Farm as an example once again, a thirty-year term life insurance policy with $250,000 worth of coverage starts at just $232.50 per year. That's less than State Farm's rate for mortgage life insruance, and for 2.5 times as much coverage to boot.
The value of mortgage life insurance decreases as you pay your mortgage down
While a mortgage life insurance policy might pay off early-on, its value decreases incrementally as you pay down your mortgage. If you only owe $50,000 on your home 15 years from now, for example, that's all your policy has to pay if you die. Worse, you'll still pay the same fixed premium no matter how much you owe on your home. So even when you owe just $10,000 on your mortgage, you'll still pay the same payment as the day your policy began.
You may want to pay off your mortgage early
For myriad reasons, many people decide to pay their homes off early. Maybe you'll want to retire earlier than you thought you would, or perhaps you'll receive a windfall while you're young. If you pay your mortgage early with a lump sum – or if you pay "extra" towards your mortgage every month – your mortgage life insurance policy will penalize your efforts in the form of a lower payout.
These plans offer no flexibility for your heirs
In some cases, you might be much better off leaving your family with a term life insurance policy that pays out in cash instead of a paid-off home. That's where life insurance comes out ahead; with a traditional life insurance policy, your family can decide whether to pay off your home or use the money for something else. With only a mortgage life insurance policy, on the other hand, your family won't have any say in the matter.
Really, the only time mortgage life insurance makes much sense is if you cannot qualify for a traditional life insurance product due to poor health. That's because, by and large, most mortgage life insurance products do not require a health exam for buyers.
If you have poor health or a chronic health condition, buying mortgage life insurance might be one of the few ways you can protect your family. In that respect and under those circumstances, any mortgage protection policy could be a "good deal."
If you're in good health, however, there are more efficient ways to protect your family in the event of your death. By buying a traditional life insurance product, you can leave behind cash your family can use in any way that makes sense. Often times, you can even get a higher level of coverage for less money over all. If your goal is protecting your family, it pays to research all of the drawbacks and benefits of either option.