It can be debated whether people benefit from mortgage protection life insurance, but in general, the truth is that most people should forgo it. Once you sign off for a new home, it's not uncommon to receive multiple offers for such a policy. This can be misleading for those who do not know much about it or have had issues with providers before, but those offers typically still come no matter how many you turn down. However, it's important to know what it is and why you do not really need it if you're financially stable.
What Is Mortgage Protection Life Insurance?
Mortgage protection life insurance is a policy designed for the purpose of paying 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. However, mortgage protection life insurance will not cover any repayments if you are unable to work due to disability, sickness, redundancy, or whatever the case may be. For this form of protection, you have to look at other types of insurance, such as critical illness or income protection. (Read 5 Types of Income Protection Insurance and How They Work to assess whether you may need one of these policies.)
Reasons to Forgo Mortgage Protection Life Insurance
As with any insurance product, it is important to carefully evaluate your situation before paying for a policy that does not serve your needs or represent a financially sound investment. (Read Insurance as an Investment? It's Called Permanent Insurance to learn how permanent life insurance can function as a viable investment vehicle.) In fact, there are many reasons to avoid purchasing 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. What this means in practical terms is that the value of your policy decreases over time because your mortgage balance decreases over time as you pay it off. 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 follows you wherever you go. (Read 9 Basic Tips for Life Insurance to get a headstart on figuring how to choose 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.