11/9/2022
Mortgage life insurance is an important part of American financial culture. Designed exclusively to keep your family from bearing the cost of your mortgage loan if you die, it is not to be confused with Private Mortgage Insurance (PMI).
Since this is a popular banking product, we'll take a closer look at what it is.
How does mortgage life insurance work?
Unlike traditional coverages, mortgage life insurance is intended to pay off the outstanding debt when the person responsible for the mortgage loan dies or has an accident that prevents them from continuing to pay.
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Depending on the policy you choose, the money can be passed on to the lender or used for survivors' expenses. It also works like regular life insurance, which compensates beneficiaries or family members a certain amount upon your death to pay off outstanding debt and other commitments.
- Interest: From 4.75% to 5.75%
- Max term: 30 años
- Interest: Consult
- Max term: 30 años
- Interest: First years fixed-rate and the rest adjustable: SOFR + margin
- Max term: 30 años
- Interest: SOFR + margin
- Max term: 30 años
- Interest: From 5.125%
- Max term: 30 años
This coverage is generally available both from the major insurance companies in the country and from the entities where you apply for a mortgage.
Often, banks often require you to take out this policy with them in order to approve your loan or to give you the best interest rate. However, by law you are not obliged to do so and you can look for the cheapest or most convenient option.
What types of mortgage life insurance are there?
It is not unusual for a coverage like this to have several versions to choose from depending on what the consumer thinks is in his or her best economic interests. In this category, you can have 3 main alternatives:
- Term life insurance. This is a common policy for mortgage transactions. It is the one that pays the remaining debt of the insured in case of disqualification or death according to the time established in the conditions.
- Decreasing term life insurance. This product is designed for people who are looking for a more specific alternative with respect to their mortgage. It works in tandem with the monthly payments that decrease the balance owed, reducing the length of coverage as you make payments. Although premiums do not decrease over time, we recommend that you take out a policy for the same term as the mortgage loan.
- Term level life insurance. The simplest and easiest to understand, this policy is distinguished by the fact that it pays a fixed sum in case of death or disability during the life of the insurance. Since the amount of money does not change no matter when one of the 2 situations mentioned above occurs, the premiums are usually higher than other options.
What are the pros and cons of this insurance?
As with all insurance, there will be things that will be very useful at any given time and others that will make you think twice about whether it is worth investing in it. Mortgage life insurance does not escape this reasoning, so here is what we like and what we don't like about these policies.
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Main benefits of mortgage life insurance policies
- Mortgage life insurance has the convenience that you don't need to take a physical exam to get it.
- If you are denied other life policies for medical reasons, you can use this insurance to protect your family from mortgage and other living expenses.
- This product serves to supplement an individual life policy. When you die, your beneficiaries get money for the mortgage loan payment and for other expenses incurred in this situation.
Disadvantages of Mortgage Life Insurance
- In declining coverage, premiums remain the same as the final payout decreases due to the mortgage payment. This outlay is much more expensive than term life insurance premiums.
- Arguably, some coverage related to this insurance favors the lender more than the beneficiaries. While the deceased takes care of the mortgage, the family receives no help for other debts.
- With a conventional life policy, the beneficiaries can use the death proceeds as they see fit, whether for education, outstanding loans, etc.
Español: Qué cubren los seguros de vida de las hipotecas