Wednesday, November 14, 2007

Mortgage Insurance vs. Term Life Insurance

The concept of buying Mortgage Insurance is tempting. And the thought of having your mortgage paid off if something happens to you is very comforting.

But all mortgage insurance isn’t the same. There are two kinds, and they offer very different coverage.

The first type is called Private Mortgage Insurance (PMI). If you buy a home with less than 20% down, your lender probably demands you have it. PMI protects the lender, not you. Let’s say you default on your home loan. Your PMI will reimburse the lender if he’s not able to re-sell your home for the amount of our mortgage.

PMI is expensive. So as soon as you have paid down your mortgage to a point where PMI is on longer required (your lender is supposed to advise you when this happens) it is wise to cancel it.
Which leads us to the second kind of Mortgage insurance: Mortgage Life Insurance. Here, in effect you buy an insurance policy that will pay off your mortgage in the event of your death, disability or some incapacitating disease.


Unlike PMI, this insurance is voluntary. And, while it’s better than PMI, most experts don’t recommend it for two big reasons:

1. Mortgage Life Insurance is generally sold by the mortgage company. You don’t get the opportunity to shop competitively for your best rates.
2. Mortgage Life Insurance has a fixed premium (generally expensive) but your benefits decline as you pay off your mortgage.


Most financial experts feel it doesn’t make sense to buy life insurance for narrow reasons. It’s much better to analyze your overall needs — how much would it take for your spouse and children to maintain their standard of living — if something happened to you? Then take out a Life Insurance policy that covers all your financial needs including your home mortgage.

Fortunately, Term Life Insurance rates are extremely reasonable today. An easy way to find out what your needs and costs could be is to contact an independent sales agency like selectquote.com with experienced, impartial licensed agents. They’ll not only help you determine your needs, they’ll “comparison shop” highly rated companies for your best rates.

SelectQuote has exclusive videos of Suze Orman offering impartial advice on buying Life Insurance.

2 comments:

Richard said...

Hey your information is quite interesting.
Mortgage Life Insurance refers to an insurance policy that guarantees repayment of a mortgage loan in the event of death or, possibly, disability of the mortgagor. Mortgage insurance protects the lender against loss in the event that the borrower defaults. The borrower pays the premium, but the lender receives the protection.
Mortgage insurance has no connection to any kind of life insurance, and pays no benefits to borrowers. The sole benefit received by the borrower is that, with mortgage insurance, lenders are willing to make loans with down payments smaller than 20% of purchase price or appraised value.

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Hadley said...

In addition, term life insurance may provide coverage to pay off your mortgage with a coverage amount that does not decrease each year.

Term life would provide funds to your beneficiaries who could use the money as needed. The term life proceeds do not have to go directly to the mortgage loan company. Term life offers a more flexible option in some instances.