Mortgage Insurance: Is it a Good Deal?
When getting a mortgage on a new home, one decision that you’ll likely need to face is whether or not to purchase the accompanying insurance policy.
Under these “mortgage life insurance” policies, your mortgage is automatically paid off if you die or are seriously disabled. That way, you can rest assured that your family won’t lose their home because of your inability to sustain the payments.
This may seem like a comforting thought, but in many cases, a regular term life insurance policy is actually a much better deal. Also, most people have some built-in disability insurance from their employer, so unless you are self-employed, this likely won’t be an issue.
The main disadvantage of mortgage insurance plans is that settlements are automatically used towards paying off a mortgage, and can’t be redeemed in cash, even if that would be a more sensible option. This means that mortgage life insurance is a lot less flexible, and doesn’t present the same level of choice as other policies.
Another disadvantage is that if your mortgage is already paid off, the settlement amounts to nothing, while a term life plan would still pay out in full, regardless of financial situation.
In terms of premiums, a healthy person can get a much better deal with a term life policy. For example, a 40-year-old nonsmoking male who is in good health can get a $250,000 30-year term life policy for about $420/year, while the less-flexible mortgage insurance would cost more like $600.
The only major cost advantage of mortgage life insurance is that it doesn’t require a medical examination, meaning that it can be a good deal for an older person, or someone who is in poor health.
For a young or middle aged person with no major health problems, however, getting a normal life insurance policy with the same value as your mortgage is usually a better deal.
Of course, the best advice one can take is to get quotes of both types of insurance, then compare the premiums. Always remember: an informed person will have fewer regrets.
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