Life Insurance For A Mortgage: Is It Worth It?

Life insurance is not a legal requirement when taking out a mortgage, but it can be a good idea. It can provide financial security for your family and help pay off your mortgage in the event of your death. There are several types of life insurance policies, including mortgage protection insurance, which is specifically designed to pay off your mortgage if you die. Other types of life insurance can also be used to pay off your mortgage, as well as cover other expenses. When deciding whether to accept life insurance for a mortgage, it's important to consider the costs, the level of coverage, and the flexibility of the policy.

Mortgage life insurance vs. term life insurance

Overview

When it comes to protecting your mortgage, you have two main options: mortgage life insurance and term life insurance. Both can help secure your mortgage in the event of your death, but there are important differences to consider.

Mortgage Life Insurance

Mortgage life insurance, also known as mortgage protection insurance, is designed specifically to pay off your outstanding mortgage balance if you pass away during the policy term. The lender is the sole beneficiary of this policy, meaning the benefit goes directly to them, ensuring your mortgage is paid off. This helps your beneficiaries eliminate debt and provides them with full ownership of the property.

Mortgage life insurance is typically sold by financial institutions and can be convenient to obtain when arranging your mortgage. It often has a simple application process and may not require a medical exam or health questions. The premiums are level, making budgeting predictable. Additionally, riders can be added for customisation, such as a waiver of premium rider that covers premiums if you become disabled.

However, one significant drawback is that beneficiaries cannot use the death benefit for any other expenses. As the benefit goes directly to the lender, your beneficiaries do not have access to the funds for other debts or needs. The payout also decreases over time as your mortgage balance reduces, and the policy ends once the mortgage is paid off. Mortgage life insurance can also be expensive for the level of coverage provided, and it lacks the wealth-building component of permanent life insurance.

Term Life Insurance

Term life insurance, on the other hand, offers more flexibility. It provides a lump-sum benefit to your chosen beneficiaries (usually family members) upon your death, and they can use the money as they see fit. They can choose to pay off the mortgage, cover debts, pay living expenses, or replace lost salary. Term life insurance policies are sold for set periods, such as 10, 15, 20, or 30 years, and the premiums are typically low for the first term.

One of the key advantages of term life insurance is that the benefit amount remains the same and never decreases, even as your mortgage balance reduces. Your beneficiaries will receive the full value, providing financial protection for them. Additionally, term life insurance is portable and remains in place even if you move, pay off your mortgage, or change lenders.

However, term life insurance usually requires a medical questionnaire and exam as part of the underwriting process. While this adds confidence that the claim will be paid, it can also make the application process more extensive than mortgage life insurance.

In summary, mortgage life insurance is convenient and ensures your mortgage is paid off, but it lacks flexibility in how the benefit can be used. Term life insurance, meanwhile, offers a fixed benefit that your beneficiaries can use for various expenses, not just the mortgage. It also provides long-term protection and is more portable. When deciding between the two, consider your loved ones' financial needs, your mortgage balance and term, and your budget to determine which option best suits your circumstances.

Pros and cons of mortgage life insurance

Mortgage life insurance, or mortgage protection insurance, is a form of life insurance designed to pay off the remainder of the policyholder's mortgage if they pass away during the policy term. This type of insurance has its own benefits and drawbacks.

Pros

• Mortgage life insurance policies generally don't require a medical exam, making them more accessible to homeowners who don't want to take medical exams for life insurance or want quicker coverage.
• Premiums are level, meaning they remain the same throughout the policy term, allowing for easy budgeting.
• Riders, or add-on coverages, can be added to customise the policy. For example, a waiver of premium rider can cover premiums if the policyholder becomes disabled and unable to work.
• It offers peace of mind for your family, ensuring that your mortgage payments are covered if you pass away or become disabled.

Cons

• The death benefit goes directly to the lender, and beneficiaries can't use it for any other expenses, such as other debts or funeral costs.
• The payout decreases as the mortgage is paid down, and the policy ends if the mortgage is paid off before the policyholder's death.
• It can be expensive for the level of coverage, especially considering that the cost per dollar of coverage increases over time.
• It lacks the cash value growth component of permanent life insurance, so it can't be used as a wealth-building vehicle while the policy is active.

Cost of mortgage life insurance

The cost of mortgage life insurance varies depending on several factors, including age, gender, health, coverage amount, term, and whether you opt for a medical exam. Premiums are typically level, meaning they remain the same throughout the policy term.

For example, a 40-year-old male non-smoker in good health can expect to pay around $59 per month for a mortgage life insurance policy worth $500,000, with a 30-year fixed premium. On the other hand, a 40-year-old male smoker in California with regular health may pay around $160 per month for the same coverage amount and a 20-year term.

Mortgage life insurance policies are generally more affordable for those in excellent to average health. However, it's important to note that the cost per dollar of coverage increases over time, as premiums remain level while the death benefit decreases.

When considering the cost of mortgage life insurance, it's worth comparing it to other types of life insurance, such as term life insurance, which may offer more flexibility and robust coverage at a lower cost.

Who receives the life insurance payout?

When it comes to life insurance, the policyholder designates one or more beneficiaries, who are the individuals or organisations that will receive the payout. This can be a single person or multiple persons, or it can be an entity such as a charitable organisation.

The policyholder can allocate different percentages to different beneficiaries. For example, if there are four beneficiaries, the policyholder doesn't need to allocate a quarter of the death benefit to each beneficiary but can instead choose to give larger or smaller amounts to each.

There are no stipulations or conditions on benefit payouts. Beneficiaries can take the lump sum and use it for living expenses, but they can also use it for any other purpose, from education to retirement savings or even going on vacation.

In the case of mortgage protection life insurance, the death benefit is paid directly to the lender to pay off the mortgage. This means that beneficiaries do not receive the proceeds and cannot use the money for other expenses.

How does life insurance benefit landlords?

Life insurance can benefit landlords in several ways. Firstly, it can provide financial protection for landlords and their families in the event of their death. This is especially important if the rental property is mortgaged, as the life insurance payout can help cover the mortgage payments and prevent the burden of debt from falling on their loved ones. It can also help cover other associated costs, such as repairs, bills, or taxes.

Secondly, life insurance can give landlords peace of mind, knowing that their financial obligations will be taken care of if they pass away unexpectedly. This can be particularly reassuring if they have dependants or family members who rely on their income. By having life insurance, landlords can ensure that their loved ones will have financial stability during a difficult time.

Thirdly, life insurance can help landlords protect their investments. For example, if a landlord owns multiple rental properties, the life insurance payout could be used to cover the costs of maintaining those properties, paying property taxes, or hiring property management services. This can help landlords maintain their rental business even after their death.

Additionally, life insurance can be beneficial for landlords who co-own rental properties with business partners. In this case, the life insurance payout could be used to buy out the deceased landlord's share of the property, allowing the remaining partners to continue the business without disruption.

Finally, life insurance can provide financial security for landlords who have taken out loans or have other financial obligations related to their rental properties. The life insurance payout can help settle these debts, reducing the financial burden on the landlord's family or business.

While life insurance is not a legal requirement for landlords, it can be a valuable tool for protecting their assets, providing financial stability, and ensuring the continuation of their rental business in the event of their death.

Frequently asked questions