What Exactly Is Mortgage Life Insurance?
Mortgage life insurance is taken out on the life of the debtor on a mortgage with the purpose of paying off the mortgage loan should the borrower die.
There are several methods used to calculate the amount that the mortgage life insurance will pay.
If you graph the balance of a mortgage that is left to pay on a year by year basis, you will find that there is a curve that stays very high in regards to what is left to pay in the early years.
If you run a typical mortgage amortization schedule, you find that in the early years, there is still lots of principal that remains to be paid. It doesn’t begin to drop much at all during the first 12 to 15 years.
If you had a mortgage insurance policy that had an even decrease in death benefit each year, there would not always be enough death benefit to cover the remaining balance of the mortgage. This type of life insurance coverage is what is known in the life insurance industry as decreasing term life insurance.
Another way to cover a mortgage would be to buy a level term policy. This type of life insurance will provide a level amount of coverage for a period of time.
For example, if you have a 30 year mortgage of $300,000, a person could purchase a level term policy for $300,000 of death benefit.
The amount of the mortgage would always be covered, and if the person were to die some years down the road, then any difference between the mortgage amount and the death benefit could go to the family.
Still another method of covering a mortgage is to purchase a permanent life insurance policy, or one that has a cash value.
In this type of policy, the premiums are more, because the actuarial calculations project the life of the policy to the average life expectancy of an individual. This requires that a reserve be established from within the policy in order to keep the premium level throughout the life of the policy.
Even though the premiums are higher in a permanent policy like this, there will be enough equity that accumulates in the policy to pay off the mortgage in advance, should the mortgagee live, in about the 22nd year.
By paying the mortgage off earlier that its normal 30 year term, a lot of payments and interest can be saved, leaving the home free and clear to the mortgage holder and his family.
The amount that is owed on the mortgage can simply be borrowed from the policy, or the policy can be cashed in, or surrendered and the cash proceeds are then paid to the lender.
Life insurance generally requires that a person be in good health in order to qualify for coverage.
If a person has cancer, heart disease, or a number of other health issues, he or she may not qualify for coverage, or if they do, the cost may be so high that it is prohibitive just for the individual to pay for it.
There are group mortgage policies that banks, lenders, and other types of lenders may have available that will simply pay of the balance of a mortgage, should the borrower die before the entire mortgage is paid off.
These policies are generally designed so that there are no health requirements in order to gain coverage. This method of covering a mortgage would be ideal if a person did have health issues.
There are advantages of purchasing life insurance coverage yourself, if your health is good and you qualify for a good price for a policy. Individual life insurance is based upon a person’s age and state of health. Term life insurance is relatively inexpensive and can easily be purchased from a variety of companies.
If both a husband and wife are working, a term life policy can be taken out on each person for the amount of the mortgage, or for the amount of each person’s portion taken as a percentage of what their incomes contribute to the overall family income.
It is also an advantage to name a spouse as the direct beneficiary of the proceeds of a mortgage life policy, as it allows more flexibility for other family needs in lieu of simply paying the mortgage.
For example the lump sum could be converted to an income stream which may be more beneficial.