Aside from your ability to earn an income; your home is likely your biggest asset. And, if you’re like most people who own homes, you want to provide life insurance to pay off your mortgage in the event of your death. Mortgage life insurance is one of the easiest ways to provide for financial security for your family and there are several types of life insurance policies that can be used for mortgage protection.
How Does Mortgage Life Insurance Work?
Mortgage life insurance is simply life insurance you purchase for the purpose of paying off your mortgage in the event your death. The policy proceeds are usually payable to your named beneficiary who then has the option to payoff the remaining mortgage balance. However, they are not required to pay the mortgage off and can use the proceeds to simply make the monthly mortgage payments or allocate the money where they choose.
Various types of mortgage life insurance policies are available, but most offer some type of fixed, guaranteed rate Your actual rate is based upon a number of underwriting criteria including your age and health, the amount of insurance and any smoking as well as hobbies or hazardous sports or avocations. Mortgage life insurance is relatively inexpensive and easy to acquire if you are in reasonably good health. Types of mortgage life insurance include decreasing term, level term life, return of premium term insurance and universal life.
Decreasing Term life Insurance as Mortgage Protection
With decreasing term insurance, you purchase a specified amount of life insurance at guaranteed level rate and the insurance coverage reduces over time. The premiums remain fixed even though the life insurance coverage has a declining balance. One of the best uses of decreasing term is as mortgage life insurance to pay off your home in the event of your death. Most decreasing term policies can be designed to have a declining balance over 20 or 30 years and can even be tied to an amortized mortgage loan. As with most term insurance, decreasing term builds no cash value and is very affordable. However, it has lost some of its appeal since level term life insurance has become so popular.
Level Term Life Insurance to Protect Your Mortgage
With level term life insurance, the insurance company agrees to provide guaranteed coverage (death benefit) at a fixed price (guaranteed premium) for a certain period of time (level term). During this period, coverage and premiums are guaranteed to remain level. However, once the initial level term period expires, rates generally begin to increase on an annual basis.
Level term life insurance and specifically 15-year level term and 30 year level term is the chief reason for the decline in popularity of decreasing term for mortgage protection. In today’s marketplace you can buy level term insurance (with a level premium and death benefit) at lower rates that most decreasing term plans. In other words, with level term, there is no decreasing balance in insurance and the costs are lower. Since it doesn’t make sense to pay more for less benefits, decreasing term insurance is no longer ultimately competitive in today’s marketplace.
Level term insurance is ideal for protecting your mortgage as you can lock-in the rate for the exact amount of your mortgage. Additionally, some companies will allow you to reduce the insurance amount (similar to a decreasing term option) on level term insurance if you do not fall below their minimum policy amount.
Using Return of Premium Term life Insurance for Mortgage Protection
Return of premium term life insurance, or ROP term, is simply level term insurance with a feature that provides for a return of premiums paid. Just like level term life, ROP term offers a guaranteed amount of life insurance at a premium rate that is fixed for the entire level term period. The major difference with ROP term is that at the end of the level term period, return of premium term insurance refunds 100% of all premiums paid. Yes, ROP term insurance provides relatively inexpensive life insurance protection with a completely guaranteed money back feature!
As you can see, return of premium policies are ideal for mortgage life insurance protection as you can have your home covered and be building cash value to access once the home is paid off. For example, if you have a 30 year mortgage, you can purchase a 30-year return of premium term insurance policy that will protect your mortgage, and once the mortgage is paid off (in 30 years) will return 100% of your premiums. The only downside to return of premium term insurance is that it is usually 2-3 times more expensive than simple level term, but the extra cost is justified in many cases by the return of premiums. Additionally, with some ROP plans, you earn a 5% rate of return on your premiums when account for the life insurance coverage, (See PDF Return of Premium Rate of Return).
Using Universal Life Insurance to Payoff Your Mortgage
Universal life insurance (UL) is a combination of term insurance and whole life insurance that provides affordable death protection with considerable policy flexibility. With universal life, the cost of insurance is based on annual renewable term insurance rates that increase annually as the age of the insured increases. Additionally, universal life offers a cash value account that grows tax-deferred at a current interest rate much like whole life insurance. Universal life essentially combines the advantages of low cost term insurance with a tax deferred savings vehicle. This unique policy design allows for adjustable policy premiums and insurance face amounts making the UL policy a versatile tool that is adaptable to changing situations and circumstances.
Universal life can be a good way to protect your mortgage but due to its expenses and fees it is significantly more expensive than any of the above term life insurance options. The one reason to use universal life for mortgage protection would be if you were likely not going to outlive your mortgage and wanted a policy with longer term guarantees.
Your home is one of your biggest assets and it should definitely be protected with life insurance. There are many potential solutions for you in securing mortgage life insurance. At MEG Financial we can provide objective information and instant mortgage life insurance quotes. Please call us today, toll free at (877) 583-3955 and we will answer any mortgage life insurance related questions or concerns.