When you’re shopping around for a new home, you’ll get offers for mortgage protection insurance. This type of life insurance is designed for homeowners, and at first look, this sort of coverage may seem like the right move. After all, don’t we want to make sure your family keeps a roof over their head after you die?
That concern, while very valid, doesn’t mean you should pull the trigger on purchasing mortgage protection insurance—here’s what you need to know about it and whether or not it’s worth it for you.
What is mortgage protection insurance?
Mortgage protection insurance is designed to pay off your mortgage with the mortgage company in the event that you’re unable to repay it yourself. This means that if you die with outstanding loans, your insurer pays the remainder of the balance directly to your lender, allowing your family continue to live in your home without having to worry about making the remaining payments.
Distinct from homeowners insurance, mortgage protection insurance functions like a type of life or disability insurance. It’s more accurately described as “a mortgage life insurance policy.” An optional purchase with your mortgage, it may seem like a smart move for your peace of mind, but it might not be the wisest financial decision.
The key difference between mortgage protection and life insurance
Mortgage protection insurance and traditional life insurance have several differences in premiums, acceptance rates, and regulations. Notably, you’ll find that term life insurance tends to come at a more affordable cost compared to mortgage protection insurance offers. But for most buyers, the key difference is in what happens to the money when you die.
The beneficiary of mortgage protection insurance is your mortgage company—not your family. Compared to a typical term life insurance policy, your family doesn’t get to see the money themselves, since it goes straight to your lender.
Why mortgage protection insurance might be right for you
For some homeowners, it makes sense to guarantee that your money goes directly to the mortgage company over your family members. If you feel your family would not be able to budget your insurance payout properly, mortgage protection insurance comes with the security that your mortgage will be paid and your family won’t be kicked out of your home.
For most, term life insurance is your best bet
On the flip side, mortgage protection insurance means that your family cannot allocate that insurance payout to cover other expenses like bills, taxes, or funeral costs. Additionally, term life insurance typically provides broader coverage, more flexibility, and comes at a lower cost, according to Bankrate.
For most, it makes more sense to buy a set amount of coverage through term life insurance that is higher than the amount needed to pay off your mortgage. With your family as the beneficiary of term insurance, they can do anything they want with the money—including paying the mortgage. In general, the only times you need the rigidness of mortgage protection insurance is when traditional forms of life or disability insurance are unavailable, either due to premium costs or approval restrictions.
The bottom line: You’ll probably want to opt out of mortgage protection insurance and shop around similar coverage through a sufficient life insurance policy.