A mortgage is often your largest financial obligation. If you die, can your family afford the payments? Term life insurance is an inexpensive way to repay the remaining balance and leave a valuable debt-free asset.
The key question is where you purchase the life insurance from. You have two main choices.
From the lender
Getting coverage directly from your lender is convenient, but often a poor choice. This type of insurance is called creditor insurance. You (the debtor) pay retail premiums to protect them (the creditor). Since the creditor is often a large financial institution, they could buy creditor insurance for a fraction of the price they charge you. They make a profit on the insurance and also get protection.
Lenders reduce their costs further by skipping an essential step: underwriting. That’s the process of figuring out if you’re insurable and the appropriate premium to charge. Instead, lenders defer the underwriting to the time of death. If they deem that you don’t qualify, the premiums may be refunded but that’s far too little to repay the mortgage. All along, you’ve been paying a high price and thinking you had insurance.
There’s more. As you make your mortgage payments, your mortgage balance drops. However, your insurance premiums don’t go down even though you’re getting less and less coverage. Since the insurance proceeds go to the creditor, what’s left for your family?
Also, if you switch lenders, you lose your insurance coverage because it’s not portable.
From an insurance company
Personal term life insurance from a conventional insurance company is a better choice. Here the underwriting is completed when you apply for insurance. You then know if you’re protected from the beginning.
In addition, personal term life insurance gives you other advantages:
- you can shop around to find the best prices
- the amount can be tailored to match your family’s needs (which are likely more than just paying off the mortgage)
- portability to keep your coverage if you change lenders
- control over how the death benefit gets used
- various options, like conversion to permanent insurance
- guaranteed premiums tailored to you
- peace of mind
The minor drawback is that there’s a little more work involved but not that much. You’ll need to find out the amount of insurance you need and select the insurer. You can also find an insurance agent who can help if you find the process is too complicated. And If you buy enough life insurance before you get your mortgage, you’re already a step ahead.
Flickr: Jay Woodworth