What is all of this confusing mail I've received about mortgage protection insurance? What does it cover? It says the mortgage is paid off if either my husband or I die prior to paying the balance on our mortgage. Is this a good deal?
Usually not. You've described mortgage life insurance correctly -- it pays your mortgage balance if you die while you still owe money on the house. It's similar to any kind of credit life insurance, which is sold to pay off debts like car loans or credit-card balances. The concept makes sense: It is important to have insurance to help you or your husband pay major bills, like your mortgage, if one of you dies. But mortgage insurance usually isn't the best way to do it.
Credit life insurance tends to be expensive for the coverage it provides. You can usually get more insurance at a lower premium by buying a regular life insurance policy. Most importantly, a regular life insurance policy will pay whoever you select as the beneficiary. Credit insurance, on the other hand, only pays your lender -- even if your family members have more pressing needs for the cash.
With a regular life insurance policy, your heirs can use the money for whatever they need, whether it's covering everyday expenses, paying down high-interest debt, paying for college, building a retirement fund, or paying your last medical bills. They can also use that money to pay off the mortgage, if they’d like. But because interest rates are so low now it probably wouldn't be their top priority. Just make sure your heirs have enough money to continue making the monthly payments.
When you do buy a home, however, it is important to reassess your life insurance needs and perhaps boost your coverage. To figure out the policy size, plug your numbers into our How Much Life Insurance Do I Need? calculator. When you know how much coverage you want, check out prices for regular term life insurance policies at InsWeb, Quotesmith and AccuQuote.
If you’re buying a house now, focus on 20- or 30-year policies, where you can lock in the same premium amount for as long as you're paying off the mortgage. If you’re in good health, the coverage will probably cost a lot less than you expect. A 40-year-old man, for example, can get a 20-year, $500,000 life insurance policy for around $400 per year. If you aren't in good health, however, credit insurance may be your only option.
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