Buying a house is a huge investment for most people.
You can buy a house without being thoughtful, careful and practical. But it’s not advisable. The pitfalls are many. You can spend too much, lock into the wrong mortgage or put yourself in a position to leave your family with a major obligation.
Banks that sell mortgage life insurance prey on that last bit of fear. Often you’ll get solicitations from companies that sell the product once you’ve closed on a house.
Should you listen, or should you throw them straight into your trash can?
That's what a listener of the Clark Howard Podcast recently asked.
Should You Buy Mortgage Life Insurance?
Do I need mortgage life insurance? That's what a listener on the Jan. 13 podcast episode wanted to know.
Stanley in Georgia asked: "My wife and I just purchased a home in June. We put down 20% and now we are getting bombarded with companies wanting to sell us mortgage [life] insurance. I know I am not obligated to purchase it. Will it benefit me to have it? I am 70 and my wife is 51."
Let's first make a clear distinction. Mortgage life insurance is not mortgage insurance or Private Mortgage Insurance (PMI).
Lenders sometimes require mortgage insurance if you’re putting down less than 20% of the cost of the home when you initiate your mortgage. That way, if you default on your loan for whatever reason, the lender gets protection.
Banks and other companies affiliated with lenders try to sell you mortgage life insurance after you've closed on your home. It exists to pay off your mortgage debt if you die with a remaining balance.
Characterized by high premiums, a lack of transparency, premiums that often aren't fixed (and therefore can increase over time) and other stipulations, mortgage life insurance policies are despised by many, including Clark.
“Mortgage life insurance is one of the worst rip-off products that the banks have dreamt up,” Clark says.
“Mortgage life insurance helps the mortgage company directly but removes the flexibility for your survivors. At the time of your passing, your survivor may or may not find that it’s a good idea to pay off the mortgage. There may be other priorities.”
Mortgage Life Insurance vs. Term Life Insurance
Term life insurance is designed to replace your income in case of an untimely death. That way, family members who rely on your income will not be left in a bad spot.
Clark loves term life insurance because, among other things, the premiums are fixed and the product is relatively simple. If you die during the policy term, your beneficiary will receive the coverage amount. And your beneficiary can do whatever they want with the money.
There are different types of term life insurance policies. But the cheapest ones involve going through a medical exam. Even the no-exam term life insurance companies often ask you a fairly extensive series of medical questions.
Clark recommends buying term life insurance with a benefit that's 10 times your annual salary.
Mortgage life insurance sends a payment to your lender to erase your remaining mortgage balance when you die. The beneficiary is the bank. Your loved ones will never see a dime. In that way, it's inflexible.
However, if you have a health issue, or if your circumstances make it difficult for you to get term life insurance, a mortgage life insurance policy may be a way for your intended beneficiary to get some sort of indirect benefit should you die with a mortgage balance.
“You don’t buy insurance that’s just for a narrow individual purpose like a mortgage life insurance policy. What would be the exception to that? If you cannot medically underwrite to own your own policy. [Because] you can buy a mortgage life insurance policy without being medically underwritten,” Clark says.
“Essentially, mortgage life insurance is not a scam, but it is a rip-off.”
If you don't qualify for a reasonable term life insurance policy, you can at least consider this type of policy instead.
Otherwise, stay away, Clark says.
There are better ways to leave something for your loved ones. Plus, who wants to pay for an expensive, inflexible insurance policy that you may never need?
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