Mortgage Insurance or Term Life Insurance?
May 17th, 2011
May 17th, 2011
You're hunting for a house, and among all the other decisions you have to make, there's the question of whether to purchase mortgage insurance (not PMI which is required by lenders) or a term life insurance policy. Either one will serve the purpose of being able to pay off the mortgage if you or the other person listed on the loan should die while there is still a balance due on your home loan. So, which is the best option?
Mortgage insurance (also known as creditor or mortgage life insurance) serves the purpose of helping the surviving partner/spouse by not having a mortgage to pay. If both people listed on the loan want this protection, both need to be insured. Typically, the mortgage life insurance is written only for a portion of the time of the loan (first 5 years) and then goes away. Additionally, the premium stays the same, but obviously, the balance decreases. This means you're paying the same amount each year for less coverage.
I believe it's in most peoples' best interest to purchase term life insurance instead of mortgage life insurance. The main reason is that it is less expensive. You can do a 20/30 year term insurance and get an amount equal to your mortgage. That way, no matter if you were to pass away, regardless of your mortgage principle balance, you would have the full benefit amount and not just the loan principle balance. In other words, your benefit will remain the same, not decrease according to the balance of your mortgage loan.
In addition to cost factors, the pay-out is also an item to consider. The mortgage insurance payment goes directly to the lender to pay off the balance of the loan. Life insurance payments go to the beneficiary, which means you can use the money where it's needed the most.
Another advantage of purchasing term life insurance instead of mortgage insurance is it discourages you from making extra payments on your loan. This is because as you reduce the balance of your principal, you are reducing the coverage amount.
There are other factors to consider. Before making a decision, discuss your particular situation with your trusted mortgage broker to determine which is the best scenario for you.
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