Why you do not need mortgage life insurance?
Mortgage life insurance is used to protect dependents from having financial difficulties in case something happened to one of breadwinners of the family. It is hard to deny that such insurance brings feeling of safety as there is no need to worry how to pay off the mortgage in case of death occurrence. However, some negative aspects can be found that can make one really wonder whether it is really necessary to use mortgage life insurance.
The main disadvantages of mortgage life insurance
First of all, usually mortgage life insurance uses the same mechanism as decreasing term life insurance. As time passes by, the debt is decreasing as well as the maximum possible pay-out from the insurance company. If a person pays all the monthly payments on time then over time he pays increasing amount of total premiums and on the contrary the coverage that he gets decreases in the same time. So it is possible to call mortgage life insurance as having decreasing benefit but with level premiums.
The main beneficiary is credit institution
It also could be said that beneficiary is not the dependents but credit institution that gave mortgage to the insured person. Bank or other credit institution can be sure that they will get their money back. Moreover, family members or other dependents do not see any of these money because they all go to the bank that issued the mortgage. Of course they get their mortgage repaid, however, in some circumstances it could be possible that they had other obligations and maybe with higher interest rates. In such case, for dependents it would be more beneficiary to get the money instead of having their mortgage paid out as it would be possible firstly repay the debt that might cost more for the family than mortgage.
Moreover, mortgage life insurance is quite an expensive policy as the premiums do not decrease and mortgage is usually taken for a very long time. So if the person pays mortgage life insurance premiums for 20 years, he pays over that time a considerable amount of money.
Furthermore, the mortgage life insurance pays out only if the insured person has passed away. If, for example, there are no additional benefits taken such as critical illness cover then it becomes more difficult to repay mortgage if one of the family breadwinners get sick very seriously and cannot earn the amount of money that equals his previous salary. In such case, as there is no death occurrence, policy will not pay the mortgage. Thus, as it insures only death it is a very narrow insurance.
Moreover, it is very difficult to change the conditions or even the provider of mortgage life insurance. The main problem is that if the person wants to switch the mortgage to other credit institution (as it might provide better interest rates or other conditions) he needs to perform additional health check-up and as time passes the health of the insured person might become worse and there are no guarantee that the policy will be renewed. Of course, it is possible to solve this problem with having the insurance policy with renewable clause. However, such clause costs additional money to the policy holder.
As it was mentioned before mortgage life insurance has a decreasing benefit over time. One might wonder that maybe mortgage life insurance itself is not a bad deal - it helps to protect family from inability to repay the mortgage. However, other alternatives also have to be considered before making a decision.
Firstly, normal term life insurance might be a better option as it pays a lump sum in case anything happens to the insured person. The benefit provided by the insurance company does not decrease over time and it is also easier to switch to another insurance carrier.
Secondly, some insurance companies might offer mortgage life insurance policies that ds not have a decreasing benefit. If something happens, the lump sum is paid out and that amount of money does not depend on how much time is left until the mortgage will be paid out. However, as the possible payout is higher compared to decreasing term mortgage life insurance, the premiums that the person will need to pay are also higher.