Insurance is risk management. Therefore, for each type, you need to decide which risks 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 risks are the same as for regular life insurance. Besides, there are different ways to get it.
Financial institutions sell mortgage life insurance to protect them from potential loss upon the death of the mortgagee. Financial institutions benefit from these policies, rather than family members or others you choose.
Let’s take a closer look at how mortgage insurance looks. If you borrow $100,000 from a bank to buy a house, the bank will write its name on the property’s address and, thus, become a co-owner up to the loan amount. This is a typical mortgage.
If you die before the mortgage is paid off, the bank has two options. He might sell the house and give your beneficiary the difference between the amount he got for the sale and the loan owed. Alternatively, it can allow your beneficiary to take over and pay off the mortgage loan. To do the second, the bank must be comfortable with the beneficiary’s money after your death. The alternative bank may accept if insurance on your life and other assets provides enough income to pay the mortgage and give your dependents an acceptable income to live on.
Another way to approach mortgage insurance when you take out a mortgage is to secure your life against the full value of the mortgage. This would supplement your current regular life insurance coverage. However, this does not look holistically at your money, so I don’t think this is the way to go. You may not need more insurance.
Mortgage insurance sold by a financial institution can be expensive and have drawbacks. First, the sum insured decreases as the mortgage balance decreases over the life of the mortgage, but the premium does not. Secondly, unlike a life insurance policy, the bank has the right to raise premiums. Third, it is not portable. Therefore, if you switch your mortgage, you need to re-apply for life insurance through your new bank.
It would be better for you to review your finances and, if necessary, purchase additional term insurance from an insurance company. You will own the policy. The financial institution does not. Your spouse or someone else you choose will be the beneficiary, not the bank. Your spouse or dependent will have the option to take out the mortgage, if this alternative is best for them.
Like all financial decisions, listen, listen, understand your alternatives, and let the Lord guide your decision.
(c) 2011, Michelle A.; Bill.