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


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