Why you might want mortgage life insurance

Why you might want mortgage life insurance

With the increase in home purchases and refinancing of existing mortgages with additional debt, a discussion on mortgage life insurance and why you may want it seems timely.

To simplify the discussion, I’m removing the word mortgage and will refer simply to the need and different types of life insurance that can provide protection to a borrower in the event of their untimely death.

If you go into debt to purchase a home, ask yourself, will anyone – spouse, children, grandchildren or significant other – want to continue living in your home after you die? Now ask yourself could those people continue to make your mortgage payments if you die? If your answer is yes to the first question and no to the second, you may want to purchase life insurance. Also ask yourself if your spouse or significant other were to die, could you continue to make the mortgage payment? Again if the answer is no, life insurance on your significant other may be needed.

There are three basic types of life insurance policies that are used to pay off unpaid debts: group decreasing term, individual decreasing term and level term. Group decreasing term is usually provided by your lender. It has the advantage of no underwriting (do not need to pass a physical) but can be canceled by the group at any time, requiring you to shop for new insurance. Individual decreasing term will require you to pass underwriting requirements but once issued will continue for the length of your loan as long as you pay the premiums. A level term policy will also require you to pass underwriting requirements but also once issued will continue for the length of the contract as long as you pay your premium.

The difference between decreasing term and level term is after the first year the decreasing term death benefit decreases while the level term death benefit remains the same. The decreasing term policy’s only purpose is to pay off the debt so it decreases as the debt does. This difference in benefit results in the decreasing policy costing less. In my 45 years, many times people have purchased decreasing term because it was cheaper when they were comparing to level term, not knowing they were getting a different benefit.

The advantages of using level term life insurance over decreasing term life insurance in covering a debt like a mortgage can be beneficial in long-term planning. First the additional death benefit can provide extra money to your beneficiaries. First-time home buyers stay in their home an average of 11 years. If using decreasing term to cover debt, you will need to purchase more life insurance at an older age. This exposes you to additional underwriting requirements and increased cost because of increased age.

When looking at either level or decreasing term life insurance ask about convertibility. Convertibility is the benefit of changing your term policy to a whole life insurance policy without proving you are healthy. Some life insurance companies provide convertibility for the first 10 years, others to age 95. This difference in benefit again results in a difference in premium. It may not seem important today when you are young and healthy, but I assure you 20 years from now, as life changes that benefit may be very important to you and your loved ones.

Life insurance provides a benefit if you die. It does not protect you if you become disabled and cannot work. This is why you should also look at disability insurance to cover your debt. As always reach out to a professional insurance agent and get option to protect you and your loved ones.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Friday in the Observer-Reporter.