Mortgage Life Insurance Is A Rip-Off

Chances are, you were offered something called Mortgage Life Insurance by the bank when you purchased your home.  Even if you weren’t, you’ve probably received something in the mail telling you how much you need it.  I get probably two or three of these letters per month and always laugh as I toss them in the trash.  Plenty of people must be buying it to justify all the advertising, but for the life of me I can’t see why.  These policies are seriously flawed to the point of being a rip-off (maybe even worse than child life insurance, another worthless product).

What Is Mortgage Life Insurance?

In short, mortgage life insurance is a special sort of life insurance policy that promises to pay off the balance of your mortgage in the event of your death or disability, freeing your loved ones from having to worry about making a mortgage payment every month.  Sounds great, right?  Not so much.  This is not to be confused with Private Mortgage Insurance (PMI), which is usually required by your lender if your down-payment totals less than 20% of your home’s value.  Mortgage life insurance is completely optional and if you’re smart, you’ll avoid it.

Why Mortgage Life Insurance Is A Rip-Off

Sparing your loved-ones from the horrors of having to scrape by enough money to pay the mortgage every month in the event if your untimely demise sounds great on the surface until you consider there are far better and cheaper ways to accomplish the same thing.  Mortgage life insurance has a few characteristics that makes it highly undesirable.

• Decreasing Benefit – As you pay down your mortgage over the years, the value of your mortgage life insurance policy goes down with it, since the insurer is only on the hook to pay off the balance of your mortgage when you die.  If you happen to die in year 29 when your balance is down to $5,000, that’s all your family will get.  Meanwhile, your monthly premium stays the same even as the potential payout decreases.
• It Insures The Bank, Not You – Banks don’t want you to know this, but mortgage life insurance is really insurance for them, not you.  Banks know that if the breadwinner of a family dies, the probability of that family defaulting on their mortgage skyrockets.  These policies really exist to help protect the bank from losing money.  That the banks have been able to convince their customers to foot the bill for their own insurance premiums is a brilliant business move, but that doesn’t make it a good deal for you.
• It’s Expensive – At only a few cents per day, these types of policies may seem cheap, at least until you compare the premium to the actual expected payout.  Unless you die within the first year of owning your home, the actual payout is going to be far less than your original mortgage amount.  Since the chances of a young homeowner dying are extremely low, most of those who collect end up doing so years down the road when their mortgage balance (and thus benefit) has already shrunk significantly.

Term Life Insurance Offers Better Coverage For Less Money

The main reason mortgage life insurance is undesirable is because term life insurance offers much better coverage for only a little more money (and in some cases less).  Head over to Netquote.com and click on the “life insurance” tab at the top of the screen.  Running the numbers, a healthy 29 year old can get a $1,000,000 20-year term life insurance policy for right at $40 per month while a moderately-healthy 39 year old can get the same $1,000,000 policy for about $60 per month.

That $1,000,000 life insurance payout is likely going to be much larger than your mortgage, for starters, and the benefit amount will never decline.  Even if you die the day before your policy expires, your beneficiaries will get the entire $1,000,000.  By contrast, your beneficiaries would be lucky to get $500 were you to die the day before your mortgage life insurance policy expired.

Before you even consider purchasing a mortgage life insurance policy, I strongly recommend you get a few term life insurance quotes, just to see where you stand.  I’m pretty confident you’ll find that term life insurance is by far the better financial decision.