Every year, millions of people either refinance their mortgage, get a home equity line of credit or buy a new home. With such a large purchase comes responsibility. To make sure that the home stays with the family in case of the mortgage payor(s) death, people will carry a mortgage life insurance plan. Which plan is best depends upon a few factors.
Your Health
Your health can have a primary impact on the type of mortgage life insurance you select. If you are in great or fairly good health, we recommend that you get your own plan as opposed to a lender's plan. This way, if your health gets worse, then no one but you can cancel the insurance and if your health gets better, you can possibly ask for a re-rate (lower rates). Now, in a situation where you know you will not be approved for a personal mortgage life, then the lender's plan may be your only option. These plans, although priced higher and cancellable, offer a more simplified underwriting process and most people qualify.
Your Age
If you are 45 or under, then a lifetime mortgage universal life plan may be best. Since most people ages 45 or under tend to move a lot, you need to be able to cover your future loans easily and without having to apply all over again or stacking several term life policies. I would select a universal life insurance plan as opposed to whole life. Mortgage universal life is much more flexible and will allow you to adjust coverage to meet your changing needs. If you find that universal life for your mortgage is not affordable, then mortgage term life is a good start. Make sure that the term policy is easily convertible to a good universal life plan (see below for more on conversion). If you are over 45, then the plan of choice should be term life insurance. In most cases, you should still be bale to secure a term plan that is as long as 15, 20 or 30 years. Since the majority of mortgages are that long, that should work. Still make sure that the plan is convertible.
Lender (or mortgagor) plan or your own, which is best?
We partly covered that option above but much more needs to be considered when trying to decide which mortgage life insurance is best. Consider the following advantages of personal mortgage life insurance:
Full control - in other words, only you can make changes to the policy and only you can cancel the policy
Convertibility - The conversion option allows you to switch to universal life (if available) without having to prove insurability. So, if your health goes bad, you are at least guaranteed a certain amount of permanent coverage for life. This will also allow you to cover multiple future mortgages with one plan.
No decreasing insurance - Most personal mortgage life insurance plans offer level coverage. In other words, as your mortgage balance decreases, your insurance still stays level. It seems that decreasing term plan would be good enough but again, your needs will change and you do not want to loose coverage as you get older. Besides level mortgage life insurance plans tend to quote cheaper that decreasing mortgage life insurance.
Portable - Most people do not realize that if the lender sells the loan (which happens often), more often than not, your lender's mortgage life insurance gets canceled. Also, what happens if you want to go to another lender? If you have your own plan, then you can move it to the new loan. If you have a lender's mortgage life insurance plan, then you need to re-qualify and now, since you are older, your cost per $1,000 of insurance is higher.
Face amount gets paid to you - If you have your own plan, then you can designate who gets the money. That will give that person a lot of control over the mortgage pay off and may help avoid unwanted estate taxes. Also, if when you got your loan, interest rates were very low, then investing the mortgage life insurance proceeds may be a better idea. You can always use the earnings you get from investing the insurance proceeds to cover the mortgage payments.
Riders - Lender's mortgage life insurance plans do not offer the same important riders that a personal mortgage life insurance plan will have. For example, a typical personal mortgage life insurance plan may include a terminal illness rider, a waiver of premium, a disability rider, a long term care rider... These riders can come in very handy if you suffer an illness.
Please note that most lenders may automatically include mortgage life insurance into their plan. You actually need to sign a waiver to opt out of the mortgage lender's plan. Why this is allowed is beyond understanding as many people may be paying for a plan they don't want or even need as they may have already secured a personal mortgage life insurance plan. Ask the lender about waiving the coverage, they are not likely to mention it.
Your Health
Your health can have a primary impact on the type of mortgage life insurance you select. If you are in great or fairly good health, we recommend that you get your own plan as opposed to a lender's plan. This way, if your health gets worse, then no one but you can cancel the insurance and if your health gets better, you can possibly ask for a re-rate (lower rates). Now, in a situation where you know you will not be approved for a personal mortgage life, then the lender's plan may be your only option. These plans, although priced higher and cancellable, offer a more simplified underwriting process and most people qualify.
Your Age
If you are 45 or under, then a lifetime mortgage universal life plan may be best. Since most people ages 45 or under tend to move a lot, you need to be able to cover your future loans easily and without having to apply all over again or stacking several term life policies. I would select a universal life insurance plan as opposed to whole life. Mortgage universal life is much more flexible and will allow you to adjust coverage to meet your changing needs. If you find that universal life for your mortgage is not affordable, then mortgage term life is a good start. Make sure that the term policy is easily convertible to a good universal life plan (see below for more on conversion). If you are over 45, then the plan of choice should be term life insurance. In most cases, you should still be bale to secure a term plan that is as long as 15, 20 or 30 years. Since the majority of mortgages are that long, that should work. Still make sure that the plan is convertible.
Lender (or mortgagor) plan or your own, which is best?
We partly covered that option above but much more needs to be considered when trying to decide which mortgage life insurance is best. Consider the following advantages of personal mortgage life insurance:
Full control - in other words, only you can make changes to the policy and only you can cancel the policy
Convertibility - The conversion option allows you to switch to universal life (if available) without having to prove insurability. So, if your health goes bad, you are at least guaranteed a certain amount of permanent coverage for life. This will also allow you to cover multiple future mortgages with one plan.
No decreasing insurance - Most personal mortgage life insurance plans offer level coverage. In other words, as your mortgage balance decreases, your insurance still stays level. It seems that decreasing term plan would be good enough but again, your needs will change and you do not want to loose coverage as you get older. Besides level mortgage life insurance plans tend to quote cheaper that decreasing mortgage life insurance.
Portable - Most people do not realize that if the lender sells the loan (which happens often), more often than not, your lender's mortgage life insurance gets canceled. Also, what happens if you want to go to another lender? If you have your own plan, then you can move it to the new loan. If you have a lender's mortgage life insurance plan, then you need to re-qualify and now, since you are older, your cost per $1,000 of insurance is higher.
Face amount gets paid to you - If you have your own plan, then you can designate who gets the money. That will give that person a lot of control over the mortgage pay off and may help avoid unwanted estate taxes. Also, if when you got your loan, interest rates were very low, then investing the mortgage life insurance proceeds may be a better idea. You can always use the earnings you get from investing the insurance proceeds to cover the mortgage payments.
Riders - Lender's mortgage life insurance plans do not offer the same important riders that a personal mortgage life insurance plan will have. For example, a typical personal mortgage life insurance plan may include a terminal illness rider, a waiver of premium, a disability rider, a long term care rider... These riders can come in very handy if you suffer an illness.
Please note that most lenders may automatically include mortgage life insurance into their plan. You actually need to sign a waiver to opt out of the mortgage lender's plan. Why this is allowed is beyond understanding as many people may be paying for a plan they don't want or even need as they may have already secured a personal mortgage life insurance plan. Ask the lender about waiving the coverage, they are not likely to mention it.
