When working with concepts and terminology every day, it can be easy to presume that others (outside of the your business) also know what things mean. Not true. This week, a homeowner said to me that she felt a sense of security for her three daughters because her mortgage would be paid off in the event of her death. Why did she think this? Because she had “mortgage insurance.” After asking more questions, I found she was talking about the MIP (mortgage insurance premium) that was part of her monthly payment. This isn’t the first time I have heard a borrower say the exact same thing. And no, she wasn’t a first time homebuyer. This was her 2nd home and she has had 3 different mortgage loans.
It’s pretty easy to see how this could be confusing to a borrower. Especially if the borrower is a first time homeowner.
Here’s the difference. The mortgage insurance that is part of the mortgage payment is NOT life insurance. Instead, it represents a premium the borrower pays when a low down payment was made at time of purchase, and/or a refinance was done with less than the required equity. This premium is paid to protect the lender against losses in the event of early default. Nothing is paid to the borrower’e beneficiaries.
As a borrower/homeowner, if you want life insurance that will pay a benefit to your family in the event of death, then you must apply for mortgage “life” insurance or preferably, just plain vanilla life insurance, with one of your loved ones as the beneficiary. Mortgage “life” insurance is generally decreasing term life insurance – meaning the face amount of the policy will slowly decrease as the mortgage is paid down. But any life insurance policy can do the same thing. If you already have a sufficient amount of life insurance, then you might not need a separate policy to cover the mortgage balance. Or, it could make sense to get level term life insurance. Whatever you do, buy life insurance directly from an insurance comnpany, not some third party middleman trying to make a profit on the insurance. You didn’t get your mortgage from the insurance company and there’s no reason to get your life insurance from the mortgage company. Except for one maybe. And that is, if you are uninsurable and cannot obtain insurance by separate application, you might want to consider the mortgage life insurance if you can get the coverage with minimal underwriting. After obtaining a new mortgage loan, borrowers often receive these offers in the mail following the closing. If that is the only insurance you can qualify for, then by all means take a look at it.
My best advice is that borrowers should speak to a Financial Planner or Insurance Advisor to see what plan of action is best for the family. That’s especially so if you have obtained a large mortgage loan and you would like the family to continue living in that home in the event of your death. Same holds true for two-income families where both incomes are required to cover monthly obligations. Most families have insufficient life insurance. And in today’s climate where mortgage balances are much larger, it is wise for families to carefully plan for housing needs in the event of untimely or “timely” death.
Until my next post . . .
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