A:

If you are the primary wage earner in your family and you carry a current mortgage on your home, it is important that you consider risk management in the event that something bad were to happen to you. This is especially important if you do not have adequate savings for your family to pay bills and live comfortably in the event of your death.

One of the best mortgage protection options is term life insurance. To market the product, many new homebuyers will receive flyers in the mail to buy "mortgage protection insurance" immediately. While a good marketing ploy, what you are simply buying is decreasing term life insurance. This is a policy that is set up in which the death benefit is defined to decrease in value, in coordination with the decreasing value of your outstanding mortgage balance each year. In the event of your death, the life insurance policy provides a tax-free death benefit somewhat equivalent to the value of your outstanding loan balance. (To learn more about various type of insurance, see our Intro To Insurance Tutorial.)

It is very important that you compare regular-level term life insurance rates with decreasing term life insurance rates before you buy. You may find that the regular level term is only slightly more expensive than the decreasing term life. For example, a 30-year level term policy for $250,000 (level premium and $250,000 coverage remains constant for 30 years) may cost a 30-year old non-smoker male $40 per month; whereas the same decreasing term life policy (premiums usually remain level, but the $250,000 will decrease to zero by the 30th year), may cost only $35. You, as the consumer, will have to decide if the slight additional premium is worth having the level $250,000 death benefit for the period selected.

This question was answered by Steven Merkel

RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What happens if my insurance claim falls below the deductible level?

    Though the ins and outs of health insurance are often confusing, the concept of the insurance deductible is relatively straightforward. ... Read Full Answer >>
  3. How is the deductible I paid for my insurance claim treated for tax purposes?

    The deductible you pay on your health insurance policy may be tax-deductible if you meet certain conditions. However, whether ... Read Full Answer >>
  4. What are the main factors that impact share prices in the insurance sector?

    The main factors that impact share prices in the insurance sector are interest rates, earnings and actuarial risk. In the ... Read Full Answer >>
  5. Why do insurance policies have deductibles?

    Insurance policies have deductibles for behavioral and financial reasons. Moral Hazards Deductibles mitigate the behavioral ... Read Full Answer >>
  6. Which emerging markets are seeing the strongest growth in the insurance sector?

    The emerging market economies seeing the strongest growth for the insurance sector are primarily the main emerging market ... Read Full Answer >>
Related Articles
  1. Insurance

    Explaining Co-Pays

    A co-pay is a set dollar amount an insured patient pays when visiting a doctor, filling a prescription, having tests performed or receiving other medical treatment.
  2. Investing Basics

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  3. Markets

    The 5 Biggest Chinese Insurance Companies

    Read about the top Chinese insurance companies by market capitalization, and learn a little about their positions in the marketplace.
  4. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  5. Insurance

    5 Ways to Lower Life Insurance Premiums

    Learn several effective methods for lowering life insurance premiums. These include quitting smoking and considering term life insurance.
  6. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  7. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  8. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  9. Credit & Loans

    5 Signs a Reverse Mortgage Is a Good Idea

    If these five criteria describe your situation, a reverse mortgage might be a good idea for you.
  10. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Theta

    A measure of the rate of decline in the value of an option due ...
  5. Equity

    The value of an asset less the value of all liabilities on that ...
  6. Derivative

    A security with a price that is dependent upon or derived from ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!