Is life insurance good for mortgage protection?

By Steven Merkel AAA
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. What are the pros and cons of owning an equity REIT versus a mortgage REIT?

    Learn about investing in equity, mortgage and hybrid REITs. Explore the different strategies REITs employ to generate income ...
  2. What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence ...
  3. What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information ...
  4. What are some examples of common fringe benefits?

    Learn how offering fringe benefits can be a strategic recruitment and retention tool for employers and drastically increase ...
RELATED TERMS
  1. Borderline Risk (Insurance)

    An insurance policy applicant that an insurance company has not ...
  2. Canine Liability Exclusion

    A homeowners policy endorsement that prevents the insurer from ...
  3. Building Ordinance Coverage

    Insurance that covers the increased cost of repairing a damaged ...
  4. Balance Billing

    When a health care provider bills a patient for the difference ...
  5. Guideline Premium And Corridor Test (GPT)

    A test used to determine whether an insurance product can be ...
  6. Cash Value Accumulation Test (CVAT)

    A test method used to determine whether a financial product can ...

You May Also Like

Related Articles
  1. Options & Futures

    Options -- Accessing Stakes In Apple ...

  2. Insurance

    Avoid The No-Health-Insurance Penalty ...

  3. Options & Futures

    These Are The Top Brokerage Firms For ...

  4. Insurance

    Rating Assurant Prepaid Vs. Delta PPO ...

  5. Credit & Loans

    Buying A House? Avoid These 7 Mistakes

Trading Center