To anyone in the process of buying a home for their family, the concept of mortgage insurance makes a lot of sense: If something happens to you, your family will have enough coverage to pay off the mortgage. However, it may make more sense to purchase a term life insurance policy instead. In order to compare term life insurance and mortgage insurance, we must first define the two main types of mortgage insurance.
The first type is called private mortgage insurance (PMI). If you buy a home with less than 20 percent down, you are usually required by law to have this coverage. PMI protects the lender, not you. Letâ€™s say you default on your home loan. Your PMI will reimburse the lender if he or she is unable to re-sell your home for the amount of your mortgage. Because PMI is expensive, most people cancel it once theyâ€™ve paid their mortgage down to an amount where PMI is no longer required. While your lender is supposed to advise you when this happens, itâ€™s wise to keep track yourself.
The second type of mortgage insurance is known as mortgage life insurance. In essence, a mortgage life insurance policy will pay off your mortgage in the event of your death or disability. Unlike PMI, mortgage life insurance is voluntary. And while itâ€™s better than PMI from a price standpoint, most financial experts donâ€™t recommend it for two reasons:
Mortgage life insurance is generally sold by the mortgage company. You donâ€™t get the opportunity to comparison shop other companies for your best rates.Mortgage life insurance has a fixed premium, but your benefits decline as you pay off your mortgage. Moreover, the premiums for a mortgage life insurance policy tend to be pretty high.
Now letâ€™s take a look at term life insurance, which provides a set amount of coverage at a fixed premium for the term period you choose. Provided you make your payments on time, your rate will remain the same â€“ despite drastic changes to your health, job or lifestyle. Here are the main advantages a term life policy has on mortgage insurance.
- You Can Choose Your Benefit Amount. With a term life policy, you can buy enough coverage to meet all of your familyâ€™s needs â€” not just the mortgage. Term life insurance buyers typically choose a coverage amount that can replace the breadwinnerâ€™s income, cover their childrenâ€™s college tuitions, and meet various other household expenses. Mortgage life insurance, alternately, is designed solely to pay off your mortgage.
- Your Beneficiary Is in Control. Upon your passing, a term life policy pays a death benefit to any beneficiaries you choose â€“ which means they can use the money any way they like. If paying off the mortgage isnâ€™t a priority for them, they can use the money to cover more critical expenses. With many mortgage life policies, the death benefit is paid directly to your lender.
- Your Policy Can Extend Beyond Your Mortgage Term. Most insurance companies offer term life policies lasting between five and 30 years, enabling buyers to choose a term based on their farthest-reaching financial obligations. A mortgage life policy, on the other hand, can only cover you for the length of your home loan.
- Itâ€™s a Better Deal. If youâ€™re in good health, chances are you can get more term life coverage than mortgage insurance for the same amount of money. While a medical exam is necessary to secure a term life insurance policy, most mortgage insurance applications donâ€™t require one. This may sound convenient, but youâ€™ll pay for the privilege of not providing your health information. The more the insurance company knows about your medical history, the more accurately they can price your coverage â€“ which translates into lower rates for healthy term life applicants.
To learn more about the differences between mortgage insurance and term life insurance, click here or call 1-800-670-3213 to speak with a SelectQuote agent. SelectQuote is impartial, and comparison shops a select group of leading insurance companies for your best term life rates.