How to Choose Mortgage Protection Insurance

Buying a home and getting a mortgage is probably the biggest financial decision many of us ever make with our personal finance and along with the mortgage insurance such as mortgage life insurance cover is often recommended.

This article explores the main issues  – is mortgage life insurance cover better than straight life insurance. Do I need this type of insurance at all?

There is so much information to wade through when buying a home, especially if it is your first home. Not only do you need to absorb all of the information about whether to take out a fixed or adjustable rate mortgage, your advisors are probably urging you (and quite rightly) to take out life insurance too.

If you want an unbiased view on insurance to cover the mortgage debt then it’s presented below.

Be very clear about what you are trying to achieve with your insurance cover.

Before you talk to a seasoned sales expert, write down what you want covered and why then be sure the policy you take out addresses your issues.

Essentially life insurance is insurance which covers the loan in the event of death of the policy holder. It’s peace of mind insurance.

Insurance to cover the value of the loan is imperative if you have dependents. It will provide some money in the event of death (or one of you become incapacitated) and are no longer able to earn. The last thing a partner and children need when faced with the loss of a loved one, is the loss of their home; their security.

At such unfortunate and unexpected times, having insurance to help cover the cost of the mortgage principal (the amount owing), will be a blessing. There are several types of insurance cover you can take out for cover of this nature the your choice will depend upon your personal circumstances.

This is comfort insurance and so you need to feel that after paying the premiums you will receive the cover if you should need it so some key questions are listed below. Most of us won’t need it but the security of having it is what’s important.

Essentially mortgage life insurance will repay the balance of the principal (what’s left to pay on your mortgage) in the unlikely event of death of the borrower.  It is generally a reducing amount so that as your mortgage is paid off the amount of insurance cover lessens.  It is paid to the bank or institution providing the mortgage.

The benefit of this type of insurance to the borrower is that they will be able to remain in the home after the death of a loved one.  That peace of mind is invaluable.

However, a viable alternative could be to purchase straight life insurance.

The purpose of life insurance is to pay out a lump sum in the event of death of the individual covered.  The lump sum is paid to the person nominated on the policy and so it can then be used to pay off the mortgage or used for other expenses.

This cover can cost considerably less than that of mortgage life insurance and it gives greater flexibility over the use of the funds. 

Some life insurance policies have a disability component as well.

Some life insurance policies combine insurance cover with a savings component.  I believe the two should be kept separate.

Insurance to cover the unlikely eventuality of death is relatively inexpensive.  Once you add on additional benefits then the price rises.

• What is the financial stability and payment history of the underwriting company? This is where the funds will be paid from.
• Is this insurance purely a lump sum payout in the event of death or does it cover disability as well? If it covers disability, what is covered?
• Is there a savings portion? Some insurance policies have a death and disability payout and some include a savings component. I believe its better to keep savings and insurance separate.
• What is the amount of the cover? Here you need to know the amount, when, how and who it will be paid to.
• Is the insurance cover a decreasing value? As you pay off your mortgage does the cover reduce?
• Who will get the money? Mortgage Life Insurance often goes straight to the bank or institution holding the mortgage so the family doesn’t receive the money. However, the family does keep the house.  On the other hand, life insurance is paid to the person or institution you nominate.

It's worth re-stating that it is really important to have insurance to cover the mortgage when dependents are involved. Although its infinitely better to be covered in full, in practical terms this may not be possible. Investing in some cover to protect your family is better than none at all.

If full cover is proving too expensive, then consider taking a lesser cover. For example, if your mortgage is $300,000, perhaps considerinsuring $200,000 giving some cover which will give the survivor(s) some time to re-evaluate the options.

However, beware of the consequences of reduced cover.

Always reevaluate your financial situation at least annually and immediately if your circumstances change.

Please note that this information is general in its nature. The financial situation of every borrower is different. Countries and lenders have different requirements too so be sure to take the time to read all the small print before taking out any type of loan or insurance.

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