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You're sitting in an office across from a mortgage loans officer. It could be in a bank, a credit union, or another lender. You've signed all the papers for your mortgage. Now comes a question that you haven't thought about: "Would you like to have mortgage insurance?" "What's that?" you ask innocently.” If you die, we'll pay off your mortgage so your spouse or family doesn't have to worry about it.” You, like many others, are tempted to respond, "Where do I sign?” But wait a minute! Think about what you're paying for before you put your name on that mortgage insurance document.
The major difference between a life insurance policy and mortgage insurance from a mortgage lender is control. With a life insurance policy, you decide who the beneficiary will be; with mortgage insurance, the financial institution is the beneficiary and gets all of the death benefit. Your appointed beneficiary gets to choose how to spend the tax-free death benefit from your life insurance policy. That could be to pay down the mortgage or other debts, invest rather than pay off a low-interest mortgage, cover living expenses, or make important purchases. These options don't exist when your mortgage lender controls the proceeds. Many homeowners don't realize that mortgage insurance is often what's called "decreasing term insurance." The amount you owe on your mortgage goes down as you make payments on the principal. At the same time, the death benefit--the amount required to pay off your mortgage--goes down by the same amount. But your mortgage insurance premiums stay the same, so you're actually getting less and less for your money every time you make a mortgage payment. Here’s another point worth considering. Many homeowners will change the mortgage lenders during the time they're paying off their home, especially if they can get a lower interest rate somewhere else. If you take your mortgage to another company, in most cases, you lose your mortgage insurance and have to apply again at the new company. In short, you lose control, value, and flexibility when you sign for mortgage insurance with your mortgage lender.
Using an individual life insurance policy to protect your mortgage offers numerous advantages. It's important to note the difference between an "individual" and "group" insurance policy. With mortgage insurance, you're a member of a group--a collection of people who have mortgage debt with the same lender. The lender or insurer may cancel a group policy at any time, and that means you'll lose your coverage. With an individual life insurance policy, you're in control, so you're the only person who can cancel or alter your policy. Another benefit if you choose the life insurance route: the value of the death benefit doesn't decrease as you make mortgage payments. A life insurance policy with a face value of $100,000 will be worth that much as long as you make the premium payments.
If you have a life insurance policy to protect your mortgage, and a better rate exists at another company, you can transfer your mortgage to that company knowing your insurance remains in force. You don't need to re-apply, and you're protected from the danger of losing your insurance because of a change in your health. Some mortgage lenders may point to lower premiums as a good reason to choose their mortgage insurance over life insurance coverage. They’ll tell you that it's much cheaper to cover your mortgage with their policy, rather than an insurance company's policy. That's not always the case. Depending on the policyholder's age and the face value of the insurance policy, individual life insurance coverage may be cheaper than the lender's mortgage insurance. It's worth talking to an advisor to see how the policies compare. Covering your mortgage debt with an individual life insurance policy can give you more value, control, flexibility, and security. The final choice is up to you. Weighing your options will help you get the most out of your money.