It can be debated whether people benefit from mortgage protection life insurance, but the truth is that most people should do without it.
As soon as you sign off for a new home, you might receive multiple offers for mortgage protection life insurance policies. These offers can be misleading for those who don't have a lot of experience reading the terms of insurance policies (see The Key Elements of an Insurance Contract for a primer), and no matter how many you turn down, the offers typically still keep coming. So, if you have just bought a house or will be buying one soon, it's important to know what this kind of policy is and why you don't really it if you're financially stable.
What Is Mortgage Protection Life Insurance?
Mortgage protection life insurance is a policy designed to pay off your mortgage should you pass away during its term. These policies run for approximately the same length as the mortgage and will pay the policy's benefit to whomever you choose as your mortgage lender. They won't, however, cover any repayments if you are unable to work due to disability, sickness, redundancy, or whatever the case may be (find out Why You Need Disability Insurance). For this form of protection, you have to look at other types of insurance, such as critical illness insurance or income protection (read 5 Types of Income Protection Insurance and How They Work to assess whether you need one of these policies).
Reasons to Forgo Mortgage Protection Life Insurance
As with any insurance product, it's important to carefully evaluate your situation before purchasing so you can avoid paying for a policy that doesn't serve your needs or represent a financially sound investment (see Insurance as an Investment? It's Called Permanent Insurance to learn how permanent life insurance can function as a viable investment vehicle). Here are three reasons why you might want to hesitate before signing a contract for this mortgage protection life insurance.
It Insures the Bank, Not You
It's important to protect your heirs from major expenses when you die. But, in a sense, mortgage life insurance protects your lender, not you. When you die, the proceeds of your life insurance policy will be paid to the bank. That will absolve your family of the responsibility of paying off the mortgage, but if you had an individual life insurance policy, your heirs would directly receive the death benefit and could decide how to settle your affairs. For example, if you have high interest credit card debt, your heirs would have the option of repaying that first.
The Overall Value Decreases Over Time
Mortgage life insurance only pays off the balance of your mortgage. In practical terms, that means that the value of your policy decreases over time as your mortgage balance decreases. As long as you're someone who pays their mortgage responsibly, mortgage protection life insurance involves making payments to insure something decreasing in value each and every month. That just doesn't add up. Plus, once the mortgage is paid, you aren't insured for anything at all, which means no payout when you die.
Every time you move or change your mortgage, you lose your mortgage protection life insurance and have to sign up for a new policy. Given how often people typically move, this is a pain and represents a significant loss exposure. A regular life insurance policy, on the other hand, will follow you wherever you go (see 9 Basic Tips for Life Insurance for advice on choosing a suitable policy).
The bottom line is that financial experts typically do not recommend insurance products for the purpose of paying certain bills because the overall value just isn't there. The majority of people who are considering protection should only look at mortgage life insurance protection as a last resort. If you're concerned about protecting your heirs, look to a more basic life insurance policy instead.