When you close on your new home it’s almost a guarantee that the offers for mortgage life insurance will start landing in your mailbox within a few weeks. With private mortgage insurance, mortgage life insurance, and life insurance all sold alongside your mortgage the options can get very confusing very quickly.
Let’s start by ruling out the one that protects the mortgage lender and not you: private mortgage insurance, also known as PMI.This is a type of insurance required by many lenders when a buyer puts down less than a twenty percent down payment. Unless you must have it, you should avoid PMI! The other two have one thing in common—they provide a death benefit to the policyholder’s family if the policyholder passes away while the policy is active. This means that should you pass away your family will be able to pay off the mortgage on the property, helping them to stay in their home for as long as they need. However, they’re actually very different products.
Understanding the difference between Mortgage Life Insurance and Term Life Insurance
Let’s start by explaining what mortgage life insurance is: it’s an insurance product that pays off the mortgage if you pass away, become disabled, or develop a terminal illness. The premiums are fixed for the duration of the policy meaning that you’ll pay the same amount every month while the policy is active. The coverage amount tracks the balance on your mortgage, so as you pay off the loan the coverage reduces accordingly. Put simply, you’ll pay the same amount every month even though the coverage amount reduces each month.
Now onto term life insurance: term life insurance is a life insurance policy that allows for a guaranteed payment amount (premium) for a fixed period, which is generally between 10 and 30 years. The coverage amount and the monthly premium stay the same for the term of the policy. If the policyholder passes away during this period the plan pays the death benefit to the named beneficiary.
Why Term Life Insurance Is The Better Option
Term life insurance offers a number of benefits over mortgage life insurance, these include lower premiums, a fixed death benefit paid to your family, and increased flexibility. Term life insurance pays the death benefit directly to your loved ones instead of the mortgage lender giving your family the opportunity to use the money for other costs should they believe them to be more important at the time. Term life policies can also be significantly more affordable than mortgage insurance premiums, helping you get the most coverage for your money. Finally, but perhaps most importantly you’ll be able to choose the coverage amount that fits your family’s needs as you are not restricted to the mortgage amount. The increased flexibility and affordability of term life insurance over mortgage life insurance make it a better option for most homeowners!