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Mortgage Life Insurance
For most of us, our homes are the single biggest investment we will ever make. While many of us may complain about making car payments for five years at a time, this pales in comparison to making a mortgage payment for 2, 3, and now in some cases, 4 decades at a time! We will likely be making mortgage payments for the majority of our adult lives and many of us will be lucky to have our homes paid off by retirement. Therefore, the truth is that when payments span decades there indeed exists a legitimate need for mortgage life insurance.
Part of the problem that most people have with buying a mortgage life insurance policy is the fact that the home buying process is already littered with policies that just seem to keep driving the payment amount skyward. There is the title insurance which many lenders require in the “freak event” that someone else may actually own the land that the lender is trying to purchase. This is an extremely rare occurrence especially since a title search is almost always conducted as part of the buying process.
Private Mortgage Insurance
Then, there is everyone’s favorite: PMI. Because so few of us can raise the 20 percent down payment required by many lenders to obtain a mortgage loan, the lending institution requires the mortgagor to obtain and carry Private Mortgage Insurance (PMI) until the loan balance is below 80% of the appraised value. Finally, there is the standard homeowner’s insurance which, when combined with the other necessary policies, tends to really drive up that mortgage payment.
With all the add-ons, it is not surprising that most people do not want to add an additional payment to their monthly mortgage bill. However, mortgage life insurance policies are one payment that will give you more peace of mind and safeguard your loved ones against financial hardship.
Mortgage life insurance pays off the outstanding balance on a mortgage loan if the policy owner expires prior to the home being paid off. A traditional life insurance policy (whole or term) would normally pay the beneficiary a pre-determined amount of money. With mortgage life insurance the amount of coverage will decrease as the loan is paid down. Thus, there will not be any cash surplus beyond the balance of the mortgage at the time of policy redemption. However, having mortgage life insurance may pay off the remaining balance of the loan—but not necessarily. Homeowners must decide the amount of coverage they want and the length of the policy. Although coverage will decrease over the course of the mortgage, the monthly payments will remain the same.
In some cases, a mortgage life insurance policy will even pay out in the event of a terminal illness. While varying from company to company, most policies define a terminal disease as one in which death is anticipated within a 12-month period from the point of diagnosis. In cases where a joint policy is in place, the life insurance will pay out when the first person either expires or is diagnosed with a terminal illness.
It is absolutely vital for policy holders of this specialized life insurance to keep up their payments. If a policy is allowed to lapse, all money paid into that policy is surrendered. The premium of a mortgage life insurance policy is determined by a number of factors, including:
- Amount of coverage
- Length of coverage
- Medical history
Because the home is most often the largest investment any person or couple has, it is vital to protect the equity. People buying their first home would not have much equity and thus would stand to lose less in the event of a sudden death. However, for people with more equity, mortgage life insurance may prove more prudent as they stand to lose more should the unforeseen occur.
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