Insurance is risk management. Therefore, for each type, you need to decide which risks to cover and how best to do it. Mortgage insurance, like other types of insurance, can be expensive, so you need to understand that the risks involved are the same as for regular life insurance. Besides, there are different ways to get it.
Financial institutions sell mortgage life insurance to protect them from potential loss upon the death of the mortgagee. Financial institutions benefit from these policies, rather than family members or others of your choosing.
Let’s take a closer look at how mortgage insurance came to be. If you borrow $100,000 from a bank to buy a house, the bank will write its name on the property’s address and, accordingly, become a co-owner up to the value of the loan. This is a typical mortgage.
If you pass away before paying off the mortgage, the bank has two options. You might sell the home and give your beneficiary the difference between the amount he received on the sale and the loan owed. Alternatively, it can allow your beneficiary to take over and pay off the mortgage loan. To do the second, the bank must be comfortable with the beneficiary’s money after your death. The bank may accept the alternative if your life insurance and other assets provide enough income to pay the mortgage and give your dependents an acceptable income to live on.
Another way to approach mortgage insurance when you take out a mortgage is to insure your life against the full value of the mortgage. This would supplement your existing regular life insurance coverage. However, this doesn’t look holistically at your money, so I don’t think that’s the way to go. You may not need additional insurance.
Mortgage insurance sold by a financial institution can be expensive and have drawbacks. First, the security deposit decreases as the mortgage balance decreases over the life of the mortgage, but the premium does not. Secondly, unlike a life insurance policy, the bank has the right to raise premiums. Third, it is not portable. Therefore, if you switch your mortgage, you need to reapply for life insurance with your new bank.
It would be better for you to review your financial affairs and, if necessary, purchase additional term insurance from an insurance company. You will own the policy. The financial institution does not. Your spouse or any other person you choose will be the beneficiary, not the bank. And your spouse or dependents will have the option to take over the mortgage, if that alternative is best for them.
Like all financial decisions, listen, hear, and understand your alternatives, and let the Lord guide your decision.
(c) 2011, Michelle A. Bill.