Why do I need mortgage protection?

Owning a home is a pretty big deal. Think about it, your home is likely your family’s most valuable asset, and it’s probably your biggest monthly payment, too. As a responsible homeowner, we assume that you’ve got your ducks in a row when it comes to protecting your home from fire, flood damage, etc. But, have you ever considered what would happen to your home if something happened to you?

Not to state the obvious, but you need to protect your mortgage so that your home stays in your family’s possession if you pass away unexpectedly.

Let’s say you have a mortgage with a spouse. If the worst were to happen, would your spouse be able to cover your share of the mortgage and keep up with all the payments? (Assuming that they’re not a stay-at-home parent?). No spouse or kids? Well, how about a co-signer then? If you’ve enlisted the help of mom and dad to buy your dream home, ask yourself if they’d be able to handle the financial burden of covering the mortgage as your co-signer(s) if you passed away.

It’s true that while we usually have a ton of safeguards in place to protect our assets from would-be thieves during our lifetimes, a lot of us don’t give the same thought to taking care of those same assets after death.

So how can you protect yourself, your family, and your home? Well, that’s where insurance comes in.

From mortgage protection insurance to life insurance for your mortgage—you have a couple of options. Read on as we explain their differences between the two and give you the lowdown on the good, the bad, and the downright ugly sides of them both. Just kidding, there are no ugly sides—just the good (pros) and  the bad (cons).

The pros and cons of mortgage protection insurance

Mortgage protection insurance is a mortgage life insurance policy that pays off your mortgage if you die prematurely. Don’t get this confused with Private Mortgage Life Insurance (PMI), which protects the bank or lender if you can’t keep up on your payments.

So, after buying your first home, you probably started receiving those “Protect your home with mortgage protection insurance!” flyers from a bunch of different insurance companies, right? And we bet they all say “Urgent action needed”, correct? If you’ve been tempted to sign up for one of these policies, it’s understandable. After all, a glossy, well-done pamphlet in your mailbox probably seems more trustworthy than the stereotypical sleazy insurance salesman cold-calling you from who knows where. But before you sign up for any of these convenient policies, you should know their pros and cons.

Pros:

• Mortgage protection insurance takes the guesswork out of how much you still owe on your pad (you can see how this would be handy at a time when your loved ones are probably stressed enough without having to crunch any numbers). It’s linked to your remaining mortgage balance, so you don’t need to worry about there being enough money to cover it if you pass away unexpectedly.
• If you have a health condition that disqualifies you—completely or financially—from getting life insurance for a mortgage (we’ll get into this next), mortgage protection insurance has got your back. You can often skip the underwriting process and get covered for probably less than the alternative.
• Overall convenience. It does exactly what it says on the tin—it protects your mortgage. It’s typically easy to get, anyone can usually buy a policy, and there’s no medical exam needed.

Cons:

• Your mortgage lender is the beneficiary, not your family. So, if you pass away, the balance of your mortgage will get paid, but your loved ones will never see a penny—zip, zilch, nada.
• To piggyback off the previous con, this kind of policy locks your loved ones into paying off the mortgage and the mortgage only—even if there are other more-pressing bills or needs.
• Although your monthly payments stay the same throughout the life of the policy, the value of it will go down—over time—along with your mortgage balance.
• It’s expensive. For an insurance type that offers diminishing benefits over time, mortgage protection insurance can be pricey. According to Policy Genius, “a $250,000, 30-year term mortgage protection insurance policy through State Farm, for an applicant in excellent health, is more than double a comparable term life insurance policy.” Yowzer.

The pros and cons of life insurance for a mortgage

An alternative to mortgage protection insurance, a standard life insurance policy (like term life insurance) lets you buy enough coverage to meet ALL of your family’s needs—and not just mortgage protection.

There are other kinds of permanent life insurance policies for mortgages, but they’re usually more expensive than both mortgage protection insurance policies and term life insurance policies. Plus, they come with a bunch of complications that are unnecessarily confusing for the average joe looking for a simple financial safety net.

And on that note, let’s get into the pros and cons of life insurance for a mortgage:

Pros:

• With term life insurance for your mortgage, you can usually choose how much you want to be covered for and for how long. You want a $500,000 death benefit at the same level premium rates for 30 years? Sure. Prefer a $250,000 death benefit over 20 years? No problem (as long as your insurance underwriter approves it of course). You’re not tied to your mortgage term. In fact, you can set the length to coincide with your longest financial obligation, e.g., kids’ college tuition, large debts, etc.
• There’s more value and flexibility. If you pass away before your term life insurance plan expires, your beneficiaries (your family, other loved ones, etc.) will get a lump sum cash amount. They can spend this money on whatever their heart desires—paying day-to-day bills, covering any outstanding debt, paying off the mortgage (obviously), and more.
• You get more bang for your buck. If you’re healthy, term life insurance is usually cheaper than mortgage protection insurance. Why? Well, the simple fact is the more an insurer knows about your health, the more accurate of a coverage price they can give you. On the flip side, although mortgage protection insurance doesn’t ask for health info, you’ll pay for the privilege of not providing it.

Cons:

• If you have any serious pre-existing health issues, you might end up paying more, just because it’s riskier to insure your life. Generally, the younger and healthier you are, the lower your rates will be.
• This type of insurance is not as convenient as mortgage protection insurance. It just isn’t. You might end up filling out a couple of extra forms and potentially having to see a doctor for a medical exam.

In conclusion

Whether you’re the new owner of a condo, a co-op, or a 4-bedroom house in the ‘burbs,  you’d be wise to consider some kind of insurance to protect your loved ones from mortgage payments and other debts after you’re gone.

If speed and convenience is your thing, or if you have pre-existing serious health issues, mortgage protection insurance has got you covered. (Remember, this only covers your mortgage and nothing else). If you go this route, don’t let your bank or lender choose the specific plan. Their priority is to protect themselves since the home technically belongs to them (until you’ve paid it off).

However, if you’re more interested in a potentially less-expensive option that lets you provide an income stream for your family while also covering your mortgage, you should consider term life insurance. This kind of policy usually offers most of the benefits of mortgage protection insurance for cheaper. It’s also more flexible, and you get more control.

Overall, buying a home is a big deal; protecting it is an even bigger one. Your home plays a huge role in your family’s financial future as it’s a substantial asset that’s likely to grow in value. Being able to cover mortgage payments after you’re gone is comforting, but you also want to make sure your family’s other needs are covered—from credit card debt to student loans to car payments, and even just cash to survive on after losing your income.

At the end of the day, we’re all different, and there’s no correct answer for everyone, but we hope the pros and cons of the two options have enlightened you in some way.