Do I Need Mortgage Life Insurance?

We get offers for it all the time, but is it a good idea?

Mortgage-protection insurance, also known as mortgage life insurance or mortgage disability insurance, is designed to pay off the balance on your mortgage if you die or become disabled, respectively. (Don't get this confused with private mortgage insurance, or PMI, which is insurance required for homebuyers who purchase a home with less than a 20% down payment.)

Unlike other insurance products, this one is mostly sold by mortgage lenders, who have a ready-made database of potential buyers, namely their own clients. But make no mistake about it: You don't have to buy mortgage-protection insurance when you're wrapping up a mortgage deal. "It is not required to close the loan," says Robert Bland, chief executive of Insure.com, an online insurance broker. "When you get these offers in the mail around the time you're closing, don't be confused."

Mortgage life insurance is purchased as a group policy, so you don't need a medical exam in order to get it. That explains why the premiums are typically 10% to 15% higher than those for regular term-life insurance. "The reason for that is the fact that the group is pitching in to help those who aren't in perfect health," says Joe Perry, a vice president at Countrywide Insurance Services. (With regular term-life insurance, the better your physical condition, the cheaper the premiums. For more on that, click here.) On the flip side, if you aren't in perfect health, you might actually get lower rates with mortgage-protection insurance than with regular term-life insurance. For example, "Usually, smokers do better with group coverage (than with) individual," Perry notes.

Of course, higher premiums aren't the only reason why these policies don't make a lot of sense for healthy homeowners. Another is that mortgage life insurance is what insurance experts call a decreasing-benefit policy. It's designed to cover what's left of your mortgage payments in case you can no longer make them, so its potential benefit becomes smaller as you pay off more of the mortgage. It mirrors the balance of the loan," says Perry. In other words, if you were to pass away a day after you paid off your mortgage (sorry!), you would've shelled out thousands of dollars to your insurer in vain.

Then, think of what happens if you die and you still have the policy. Fair enough, your mortgage would be paid off. But what about the cars, the kids' education and your funeral expenses? "If you're the only bread winner and you need insurance to protect your family, you need insurance that protects a lot of different things, not just the house," says Robert Hunter, director of insurance for the Consumer Federation of America. Roughly, he explains, a family of two needs insurance for at least five times their annual household income. If you already have that coverage, a mortgage life insurance would be redundant. If you don't (and you're in good health), you'd be better off with a basic term-life policy.

"The cheapest and most efficient way to buy life insurance is all in one place," Hunter says. Right now, a 40-year-old male nonsmoker could buy a 30-year term-life policy with a $250,000 payout for about $420 a year, according to Term4Sale, a Web site that lets users compare term-life insurance quotes. The same person would spend about $600 a year if he or she bought a $250,000 mortgage insurance policy from Countrywide instead. (Again, that's a great deal for 40-year-old smoker, who'd have to shell out roughly $1,480 a year for a 30-year term-life policy.)

And who gets the money from your mortgage life insurance policy if you die? Surprise: Typically, it's the mortgage company itself, Hunter says. With term life, on the other hand, your beneficiaries would have the freedom to do with the money as they see fit. Suppose, for example, that your investment accounts earned 10% at the time you died, and your mortgage interest was 5%. Your spouse would probably prefer to invest the proceeds from the insurance policy and continue to pay off the mortgage monthly. Not an option with mortgage life insurance. "It gives you no choice; it just pays the bank," says Hunter. "That's a big disadvantage, in my view."