Six Questions about Buying Mortgage Life Insurance
You’ve worked hard and after five years of disciplined savings, you’ve been approved for a 20 year $200,000 mortgage. It’s an exciting time and amongst the financial decisions ahead of you is determining if you should buy the bank-sponsored mortgage life insurance policy recommended by the loan officer.
Bank mortgage life insurance is not required but you both agree that if either of you dies, you want the survivor to receive a life insurance benefit so he/she can pay off the mortgage.
Here are six questions you should consider when comparing a bank sponsored policy to an individually owned $200,000 20-year term life insurance policy.
What do the policies cost?
Generally, bank sponsored policies are less expensive than individually owned term policies
Do we get to choose the death benefit?
With the bank policy, the original death benefit equals the amount of the mortgage and it declines as the mortgage balance declines.
You decide the death benefit of individual level term policies and it remains at the original face amount throughout the entire twenty year period.
Example: If you die at the end of 15 years, the bank plan will pay off the mortgage balance while the individual policy will pay your beneficiary the full face amount of $200,000.
Do we get to choose beneficiaries?
As the policyowner, the bank makes itself the beneficiary and at your death the bank will receive the death benefit and pay off the mortgage.
With an individual policy, you choose the beneficiary who will have the option to pay off the mortgage or continue to make mortgage payments and invest the death benefit.
What happens if we sell this house and buy another one?
When you pay off this mortgage, the bank will cancel your policy and you will have to requalify for a new policy based on your health and age when you get a new mortgage.
An individually owned policy will not be affected if you pay off the mortgage and you will not have to buy new policies. If you are seriously considering buying another home with a larger mortgage in ten years, you should buy a larger policy now at the lower rate.
What happens if we live until the end of the mortgage?
In twenty years, like the mortgage balance, the bank policy death benefit will be zero and the policy will be canceled.
At the end of the policy term for individual policies, you have the option to convert some or all of the term life insurance to a permanent policy.
If one of us dies, what happens to the survivor’s policy?
The bank policy survivor’s death benefit will be canceled and no future premiums will be due.
As policy owner, the survivor can continue paying the premium and choose a new beneficiary. Or, he/she could cancel the policy or convert all or part of the death benefit to permanent insurance.
As with all life insurance purchases, qualifying for mortgage life insurance is based on your age, health, and lifestyle. Consider these six key questions before making your choice and beginning the underwriting process.
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