A potential “helping hand” for a homeowner’s heirs. No one wants to saddle their heirs with the hard choice of paying off an unsettled mortgage or selling or losing a home. A mortgage term life insurance policy can provide relief in such a dilemma.
Simply put, this is a term life policy designed for homeowners. If you die owing a huge sum to a mortgage lender, the proceeds from the policy will pay off the note.
Why, and why not? The pros and cons of mortgage term life are simply stated. On the plus side, you are paying (relatively) little for a lot of potential mortgage protection, which could be useful if your heirs are in no financial shape to make mortgage payments. On the negative side, term insurance is term insurance. If you live past the term of your mortgage term life policy, no benefit will be forthcoming for all those premiums. The premiums paid are commonly lumped into the mortgage, which means that finance charges are being tacked onto them.
You don’t find many fans of mortgage term life insurance in the mortgage industry. Their argument is that a regular term life insurance policy could do the job just as well, and give your heirs more flexibility besides. With a conventional term life policy, your heirs will get the death benefit; with a mortgage term life policy, the mortgage company will.
Still, quite a few homeowners want mortgage term life insurance and appreciate its designated purpose. Among them are people who can’t qualify for a conventional life policy and people who can’t find life insurance coverage at the price they desire.
Most mortgage term life insurance takes the form of the level premium/level benefit policy. You can purchase these policies with 30-year terms or with shorter terms. As the name implies, the premiums are guaranteed to stay level for the entire policy term, and the benefit amount does not decline with time.
Some homeowners decide to get return-of-premium term life policies instead. ROP term life policies were designed to respond to the “live and lose” problem associated with ordinary term life. With a term life policy has a return-of-premium rider attached, the insurer will give you some or all of your premiums back if you outlive the term (provided, of course, that you’ve kept your policy in force). Someone with 20 years left on a home loan could get a 20-year ROP term policy for a comparable amount and recoup some or all the money they paid into the policy back 24 years later, assuming they outlive the term of coverage.
How is this different than private mortgage insurance? Well, PMI isn’t about protecting you at all. It protects the lender if you default on your home loan; it diversifies that risk to a third party.
Should you look into these options? You might be in a situation in which you really don’t want to risk burdening your heirs with an existing mortgage – especially if they are trying to pay off one themselves. Or, maybe you want a more flexible insurance option that could be used to pay off a mortgage or meet other needs. Talk to your financial or insurance advisor today to explore this a little further.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.