Mortgage Protection Insurance: What is It and Do You Need It?
I’m Sure You’ve Heard of It
If you’ve ever bought a home, I sure you remember that along with the congratulations and house warming presents there comes another, less wanted gift – junk mail. So, so much junk mail. Along with the coupons for Home Depot, food stores, and home warranties you’ll also find more than official looking envelope for something called mortgage protection insurance.
I bought my home in 2015, so I’m a little fuzzy, but I think I received on the order of 9 or 10 ‘offers’ for mortgage protection insurance over the first 3 months of living at my new place, and I’m sure that probably matches your experience as well. If you don’t own a home yet, I suggest getting a nice outdoor fire pit because you’re about to get a bunch of free kindling.
But what is mortgage protection insurance, exactly? And is it worth purchasing?
It’s Life Insurance
As you may have guessed, it is a type of life insurance, though it can be easily confused with private mortgage insurance, otherwise known as PMI (which insures against defaulting on the loan) or home/fire insurance (which insures the building and land itself).
The way mortgage protection insurance works is supposed to go like this – you take the policy out on yourself – sometimes the company that holds the mortgage is the direct beneficiary, but more commonly these days you are allowed to choose the beneficiary.
The life insurance amount is limited to the amount of the mortgage, and will decrease over the life of the loan to match the outstanding balance (the decrease generally stops somewhere around years 10-15 but these policies are quite variable).
Cumulatively, the face amount (which to the insurance company is exposure to loss) should be much lower, which should in theory allow the insurance company to charge less than a regular vanilla level term policy. However, most of the companies that offer this are not life insurance companies and want to try and tuck this policy in your home insurance quote without you noticing it’s extremely overpriced.
Not All Life Insurance Policies are Equal
Here’s the thing though – most of the well companies that sell mortgage protection insurance aren’t big into the life insurance game. Most of them come from the large auto and home carriers you predominantly see on TV ads with smashed up cars and funny lizards.
They want you to treat it as an add-on which they hope you won’t competitively price shop!
State Farm is probably the biggest seller, so let’s take a look at their quote:
Ugh – $127 bucks a month for $500,000 which won’t be $500,000 for very long? Let’s see if there is a better way – This is for a 35 year old male mind you, and I claimed I was in Excellent Health for this quote!
Two Better Options to Save a Bundle
First, let’s check all of the other life insurance companies and see if we can do better on a level term policy:
Maybe State Farm knows that I lied about being in perfect health and that I consume far too much meat for my own good – Let’s knock this rating down to Standard
That should show you how uncompetitive mortgage insurance really is – (remember this is a worse health rating!)
By simply trading to a 30 year term policy from Banner, Prudential, Principal or any of the others, you could save about $950 bucks a year.
But, what if you’re a real bargain lover and $950 isn’t enough for you… Is there a way you can save more?
Custom UL – Less than $29 a Month!
44 bucks a month isn’t bad for $500,000 of coverage… But what if we could get it for $28? Would you be interested? I’ve got a secret – it’s possible! We are going to use a very popular product – Protective’s Protective Custom Choice UL – It’s a Universal Life Policy we’re going to customize just for you.
In this instance – we are going to use the policy to guarantee $500,000 in coverage for 20 years, and then use the same premium amount to buy a yearly amount of insurance for the next 10 years. It sounds way more complicated than it is.
Here is an example:
If you’d like me to craft a specific custom quote for your situation that’s cheaper than term – don’t hesitate to give me a shout using Calendly to schedule your own 15 minute review session!
Can we do even better?
Yes! What if you could get a policy that pays off your mortgage for you? But that deserves its own article
We’ve Established It’s Affordable, But Is It Necessary ?
Every commissioned life insurance agent you talk to is pretty much going to argue yes of course you do! But do you really?
What do you want to have happen to the house? If you don’t take out life insurance this is most likely what will happen (assuming no fancy trusts or advanced planning) if you die with a mortgage:
- The house and any obligations on it go into probate
- The estate can either pay off the mortgage or choose to pass it to the beneficiary (this can depend on the lender)
- If it mortgage was not paid off, the house passes with the mortgage to the beneficiary
- The beneficiary needs to carry the payment until the mortgage loan is paid off or the house is sold
If your beneficiary can carry a $2500+ a month mortgage until they figure out what to do with it, or if your Estate can cover the purchase (remember, any retirement assets bypass probate and go directly to beneficiaries so don’t count them) save your money and skip the mortgage protection.
If you are fairly unconcerned that that your beneficiary might be forced into a fire sale (hopefully not your spouse in this case!) than you also probably don’t need it – but I doubt that type of person makes it through the first 900 words of this article….
Everyone else – Yes you need life insurance to cover your mortgage. The good news is that you can contact me to search through more than 50 carriers to find the best option for you right now!