Mortgage Protection Insurance

[Spencer Krautkramer]

1. I’ve gotten a couple letters in the mail after just recently purchasing my first property - they are about Mortgage Protection Life Insurance or Mortgage Payment Protection Programs. Is this spam or legit, and what is everyone's thoughts on this? Is it something that’s worth doing and paying for or not?

[Mike S.]

A mortgage life insurance is a kind of term life insurance that will pay the remaining balance of your mortgage if you die before the end of the mortgage.

The amount of death benefit decreases every month as your mortgage balance decrease. The amount of premium you pay monthly could be averaged over the total duration of your mortgage or can decrease based on the amount left at risk.

Like most term life insurance, they are usually cheap (if you are reasonably young and have no preexisting medical issue). They rarely pay out (less than 2%) as you are expected to live past its term.

Term life insurance has its place to cover your family if you die early. It is often used to replace your salary for a spouse or to pay for your children expenses until they are old enough to work.

Another kind of insurance is permanent life insurance (the most common today are Whole Life and Index Universal Life). As these insurance are covering your for the totality of your life, they will have to pay eventually a death benefit. So for the life insurance company, compared to a term product where they only pay out 2% of the time, they now have to pay out 100% of the time. It make these products much more expensive to purchase, but on the other end you are sure that your family will benefit from it.

So depending on your financial profile and your needs, it may be advisable in some case not to use any term products but only permanent life insurance instead, or a combination of both.