Do I need to buy mortgage life insurance?

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Dear Insurance Adviser,
What is mortgage protection insurance, or mortgage life insurance? Should I purchase it? I don’t want to leave my two children with the burden of paying the mortgage.
— Esther

Dear Esther,
Mortgage life insurance is a policy sold by your mortgage company/bank that pays off your mortgage upon your death. The beneficiary of this type of policy is almost always the mortgage company. Under some circumstances, that may be your preference. But in many cases, it may work out better for your loved ones to receive the proceeds themselves, giving them the choice of whether to pay off the mortgage. There may be more pressing needs than paying off the house.

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Term life insurance sold in the open market is often more competitively priced and allows you to name your children as the beneficiaries rather than the mortgage company.

Mortgage life insurance has other disadvantages, too. The premium you pay is often lumped into the home loan, which means you are paying finance charges on the premium. A healthy nonsmoker can usually beat the price of mortgage life insurance by as much as 50 percent. Another disadvantage is the insurance stays with the house. In other words, it’s not transferable the way regular life insurance is.

Who should buy life insurance from the mortgage company? If you are obese, have high blood pressure, are a smoker, have diabetes, or have other health issues that keep you from getting preferred rates or in some cases keep you from getting life insurance at all, check out mortgage life insurance. It may be your only option.

By the way, I’m not a huge fan of any type of insurance designed to pay specific bills, including mortgage life insurance. You buy life insurance to minimize the financial impact of your death on your surviving loved ones who depend on your income (i.e., your spouse and kids). Determine how to do that with the assistance of a good life insurance agent or financial planner. Then go out and buy the appropriate amount of coverage.

All the best.

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