I recently was meeting with a client and the topic of mortgage life insurance came up. They had recently been solicited for a policy and wanted to know if such a policy made sense for them.
Before we discuss mortgage life insurance, let’s make sure we are talking about the same thing. I am not talking about private mortgage insurance, typically called PMI. If you purchase a home and put less than 20% down, you will probably be required by your lender to purchase PMI. Private mortgage insurance does not protect you. It is there so that if you are unable to pay your mortgage, the lender is covered for the amount of the mortgage.
Mortgage life insurance is a policy that will repay your mortgage in the event of your death, disability, or some incapacitating disease. This type of insurance is not required. It is a decision solely up to you.
It rarely makes sense to purchase insurance for such a narrow purpose. When it comes to life insurance, you are usually better off analyzing the needs of your dependents, looking at what they would need to pay off debts and replace your income if you were gone, and then purchasing enough coverage to satisfy those needs.
In some cases, it may not even make sense for your dependents to pay off a mortgage. It might be more suitable for them to continue the mortgage payments and put the insurance proceeds to other purposes.
What I advised my client when this discussion came up is that any type of life insurance purchase should not be a kneejerk reaction to a solicitation by telephone or mail. These people are offering you a product without any knowledge or understanding of your overall financial picture.
Now, that does not mean that there are never any situations where mortgage life insurance does not make sense. Because these policies are typically mass marketed, they often have lower health standards in order to qualify. If you have a pre-existing health condition or are in poor health in general, you might pay a lot more for a standard life insurance policy that pays off your home versus purchasing a mortgage life insurance policy.
There could be special situations in your estate planning where maybe a second home needs paid off, and it is simpler to have a policy in place just for that need.
For the most part though, you are usually better off taking a look at your overall financial picture and simply buying more traditional life insurance to cover your home.