Alongside all your other bills, a mortgage is a huge commitment. Maybe even one of the biggest expenses you will incur in your lifetime. Therefore, it’s no surprise that many people choose to protect their investment with mortgage life insurance.
Weighing up the pros and cons of mortgage life insurance is an important step to take before you purchase a policy. While it can provide reassurance, there are also some drawbacks that should be considered.
What is mortgage life insurance?
In a nutshell, mortgage life insurance refers to a life insurance policy used to cover your mortgage loan. This means when you die, your loved ones are stuck with the bill, instead they use the cash lump sum from the policy to make repayments.
Just like any type of insurance, you pay into a fund with the promise of a payout should something happen. This provides peace of mind for the family, knowing that their home won’t be at risk if they lose your income.
Types of mortgage life insurance
There are several types of mortgage life insurance available. Most are either term or whole-of-life policies.
Term life insurance is the most popular and cost effective option for homeowners. It offers a death benefit for a set period, usually 20 years. This type of policy is typically used to cover mortgages with repayment terms lasting that same length of time.
Decreasing term life cover is a popular cover choice for mortgages. This is because the policy is tailored to your mortgage loan. The death benefit decreases over time, as the balance of your mortgage reduces.
Whole-of-life insurance offers a guaranteed payout upon death – no matter when – and is also suitable for those with long repayment periods. However, premiums are typically more expensive for this type of cover as there is no set end date.
Another option is joint life insurance. This is a policy taken out between two people, usually couples. The policy pays out on the death of either party. Thus, providing an income for the surviving partner to continue making payments.
Pros of Mortgage Life Insurance
There are several advantages to having mortgage life cover in place, such as:
- Peace of mind: No longer do you need to stress over what might happen to your family’s home if you die. Instead, you can relax knowing your family will be provided for.
- Ease of Use: It’s easy to set up cover, simply purchase a policy through your mortgage lender or an insurer. Then it’s just a case of paying your monthly premiums.
- Protection for your family: Ensures your family will not be left with the burden of paying off your mortgage if something happens to you. This can help them maintain their financial stability and avoid losing the home.
- Flexibility: Policies can offer flexibility in terms of cover options. You can choose the duration of cover to align with the length of your mortgage.
Cons of Mortgage Life Insurance
Like any purchase, mortgage life insurance has its flaws:
- Higher premiums: Policies such as whole life insurance are usually more expensive than a term life policy. While it provides permanent cover beyond a mortgage, it will cost more in premiums.
- Limited cover: the policy typically covers only your mortgage debt, and may not leave enough funds for other expenses. Understand the limitations of your policy to make sure your family is taken care of in the event of your death.
- Lack of cash value: Unlike other types of life insurance, mortgage life insurance does not build any cash value. This means that if you cancel the policy before it expires, you won’t receive any money back.
What happens to the mortgage if I die?
If you pass away before your mortgage is paid off, the responsibility falls to your surviving family members.
When you die, the loan doesn’t end, and the lender may take action. Your family has several options depending on their financial situation:
- Pay off the mortgage: If your family can afford it, they may choose to pay off the loan in full. This will ensure that they retain ownership of the property and are free from further financial obligations.
- Sell the property: If the family cannot afford to pay off or refinance the loan, they may choose to sell the property. This can help them pay off the outstanding debt and provide financial security.
- Transfer Ownership: The deceased’s family can transfer ownership of the property to another family member or friend, who will then assume responsibility for the mortgage. This may be a good option if the family cannot afford to pay off the loan or refinance it.
- Defer Payments: Lenders may allow families to defer payments on the mortgage for a certain period of time. Giving them a chance to sort out their finances.
All in all, it’s worth having mortgage life insurance if you’re concerned about what would happen to your home if something happens to you. This can save your family the financial burden of paying off the loan or selling the property.