You guys were right. Less than a month since we closed on our mortgage loan, we are already getting bombarded with letters offering “mortgage life insurance”. The official-looking letters seem like they are from your lender, but are really just another piece of junk mail.
The pitch is pretty simple – it will pay off your entire mortgage in the event of your death. You don’t want your family to lose their home, do you? *sniff* *sniff* If I do it soon, I don’t even have to submit to a medical exam. (This is not the same as Private Mortgage Insurance or PMI, which is to protect the lender when you have a small downpayment.) The problem is that it’s usually a better idea to simply buy a plain term life insurance policy with a comparable or greater cash payout. Here’s why:
Term Life Insurance Offers More Flexibility
So let’s see, if I buy mortgage protection insurance and die then my loan is paid off. What about the rest of the monthly bills? Childcare? The house isn’t everything. Wouldn’t you rather leave your family a lump sum of cash to do whatever you want with, rather than have a paid-off home with all of the equity stuck inside? They could even buy an annuity to replicate your income.
Mortgage Life Insurance Has A Shrinking Payout
Remember, this insurance only covers the mortgage. As the years pass, you keep paying premiums, but your loan balance keeps on shrinking! After 10 or 20 years, your benefit will be greatly reduced. Compare this with most term life insurance policies which offer a fixed payout.
Oh, and don’t be fooled by a “return of premium” (ROP) feature. Sure, they’ll refund 100% of your premiums at the end of the term. Not only does this cost more than non-ROP insurance, but that’s ignoring the fact that in the meantime they’ve been investing your premiums and making lots of money off of it (which you could have been doing instead). And if you miss just one premium payment you’ll be disqualified.
Term Life Insurance Is Probably Cheaper
Insurance is all about statistics. If the policy requires “no medical exam”, then it’s going to be more expensive in order to cover everyone. If you don’t smoke and are in average or above-average health, then you should simply apply for insurance that does require a medical exam. Now, if you are in poor health, then this might be an opportunity to get some insurance that otherwise might not be available to you. But remember that there are also a few no-medical-exam term life insurance companies out there.
Mortgage Protection Life Insurance Is Hugely Profitable
In addition, simply since this product is marketed by fear (remember your homeless family!) and primarily through unsolicited mailings, it has a higher profit margin and thus higher cost than regular term life insurance. This is supported by this InsWeb article that states:
The National Association of Insurance Commissioners (NAIC) says that mortgage insurance lenders pay out only about 40 cents in benefits for every dollar consumers spend buying that type of policy, compared with 90 cents on the dollar paid out to consumers who hold regular term life policies.
60% profit vs. 10% profit! I wouldn’t even bother myself, but if you must, simply comparing quotes with an insurance comparison website like SelectQuote will provide you an easy answer as to which is a better deal.