Mortgage life insurance: Why I passed
Mortgage life insurance is marketed by the banks as a flexible, low-cost way to protect one of your largest financial obligations. If you face a terminal illness, or have a serious accident, mortgage life insurance can help you out. It will pay for such things as:
- The outstanding mortgage principal amount, up to $500,000
- Up to five years of accrued interest, and
- Any debit balance in your tax account
The concept behind mortgage life insurance is a good one. It protects your family against unexpected illness, accident, or death.
However, I declined the bank’s insurance coverage when we purchased our new home and kept enough term life insurance to protect my family.
Mortgage life insurance is the one financial product that goes down in value as you continue to pay, yet this is promoted as a benefit. The marketing material says: your premiums will not increase for the term of your mortgage, even as you get older. It’s comforting to know that this important coverage will remain affordable.
But that also means that relatively it costs more over time. As the mortgage principal decreases the cost stays the same.That’s called a declining benefit.
The monthly mortgage insurance costs for a 30-something couple with a $300,000 mortgage can range from $75 - $120. Four years into a 25-year mortgage with a four-and-a-half per cent interest rate, your outstanding mortgage balance will be reduced to $270,000, but you will continue to pay the same mortgage life insurance premium.
On the other hand, a $600,000 5-year term life insurance policy only costs about $50 per month for a 30-something non-smoker. You get twice the coverage with term life insurance for half the cost of mortgage life insurance.
Life insurance also protects more than just your mortgage, which is just one expense your family will face if you die. Other family needs can include funeral expenses, your children's education, and income replacement.
Life insurance gives your surviving spouse or beneficiary the option of paying off the mortgage or using the payout for other purposes. With mortgage life insurance, the bank is the beneficiary and only the mortgage will be paid off.
Mortgage life insurance is not a requirement to qualify for a mortgage and term life insurance is much cheaper and offers greater protection than the mortgage life insurance offered by your bank. That makes it my choice.