Mortgage insurance may not be worth it

Dear Money Matters,
Over the past several weeks I have had numerous phone calls about mortgage insurance. What is it and are there any pitfalls that I should be aware of when considering this type of insurance? -- Joe

Dear Joe,
Mortgage insurance is exactly what the name implies. This is a form of insurance that protects your loved ones by paying off your mortgage should you die.

If that sounds like life insurance, it should, because mortgage insurance is a variant of life insurance and is priced in a similar fashion. Premiums will vary from one company to the next, but a 40-year-old man who doesn't smoke should expect to pay somewhere in the neighborhood of $50 a month for $100,000 of coverage. The larger the mortgage covered, the larger the premiums will be.

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Mortgage insurance may seem like a sensible option, but there are a number of issues to consider. For one thing, it can effectively duplicate life insurance coverage. If you already have, say, $1 million in life insurance coverage, that easily should cover your mortgage. Buying mortgage insurance on top of this probably would be a waste of several hundred bucks a year.

A second issue is the decreasing amount of coverage. While term-life insurance's death benefit remains the same, mortgage insurance decreases as you pay down your mortgage.

On top of that, even though you're effectively getting less coverage, you'll continue to pay the same premiums, as those have already been calculated to take into account the shrinking death benefit.

Finally, mortgage insurance is limited to your mortgage. Life insurance, on the other hand, can be used by your survivors for anything they like. That gives your loved ones more flexibility as to how proceeds from the coverage may best be used.