Confused About Term Life Insurance / Mortgage Insurance

Question

I'm looking for a term life insurance policy that will be gradually reduced in coverage amount over the life of my mortgage until it's zero at the end. The reason is that I want to have a consistent coverage amount for my family in the event of my death. With a standard set coverage policy, my family will have a net worth of (coverage value - mortgage principal) which is quite a variable! My insurance is with State Farm and they have such a policy (one for 15 year mortgages and one for 30), but the premiums are 3 times the price! I'm not sure why it's so much more. My questions are...

• Is there something else out there like this?
• Why would State Farm's policy cost so much more when the coverage is actually less (over time)

Answer 1

Yes there are quite a few products available. These are typically called "Decreasing Term Life Insurance as would act like the way you are looking for. Refer to the link for more details. http://www.mortgagelifeinsurance.biz/decreasing-term-life-insurance.asp

It is to be noted that Decreasing Term Life insurance covers only the payments in case of your death.

There is another insurance called "Mortgage Protection Life Insurance" that not only covers your payments in case of death, but also due to inability to work due to critical illness or accident etc. You have not mentioned the policy of State Farm you are looking at. If its Mortgage Protection, it would cost more as it is counting more eventualities for your inability to pay.

There are other ways to coverup the risk if you like to consider.
Create your own Term insurance for multiple amounts and tenors. For example if your Mortgage is say 25000 for 15 years, say the outstanding after 5 years is 20000, and after 10 years is 10000. Buy a term insurance for 10K for 15 years, another one 10K for 10 years, 5K for 5 years. My guess is the rates may work out cheaper and the charts followed for pure term has a large population / spread.

Another option is to do a term of 25000 for 15 years, as over the period your life style changes which means one needs more cover. So the reduction in pricipal is offset by the need to have more cover.

Answer 2

None of the several answers (including the accepted answer) to this question have brought up an important issue, and so I am resurrecting this question.

A mortgage is a contract between the lender and the homeowners, and, unless the mortgage specifically says so to the contrary, the mortgage terminates and the entire balance becomes due upon the death of either of the co-owners. Death also changes the income stream supporting the mortgage payments, and so unless the mortgage specifically says that it survives the death of one co-owner and the other(s) can continue making the mortgage payments, the whole amount is due. Many lenders require termination upon death because of the changed circumstances, and while they may be amenable to putting a new mortgage in place for the surviving co-owner(s), that is a whole separate transaction, and the terms will depend on the new FICO score etc. A grieving spouse may also have to put up with many more hassles to get a new mortgage, etc.

Thus, for many reasons, many people think it best to have enough insurance to pay off the mortgage entirely and have the spouse not have to worry about mortgage payments in addition to all the other problems of running a household as a single parent. Naturally, an insurance policy that pays $200K in a lump sum tomorrow is going to be more expensive than one that becomes an annuity tomorrow and pays the monthly mortgage payment amount over (say) the next 20 years.

There are term life insurance policies available (not necessarily through your lender and not necessarily where the beneficiary is the lender) that charge a level premium over the duration of the mortgage, and whose face value (death benefit) is a reducing amount that closely matches the balance still owing on the mortgage. Those who have looked at the amortization schedule given to them by the lender will know that the amount owing on the mortgage decreases very slowly at first and rapidly towards the end: the face value follows much the same schedule. Because the premiums are the same for each year, the policy holder overpays in some years and underpays in other years in comparison to a pure term life insurance policy, but with the mortgage insurance policy, there are no issues about medical exams or renewability or the rates that might be charged for future renewals. Most term life insurance policies have terms of one, two, maybe five years, and have to be renewed, usually at a different premium which might or might not be guaranteed at the time the initial policy is issued.

So, read your mortgage contract before deciding on what insurance you want to get to help your family pay the mortgage after you are gone.

My personal recommendation would be to pay off the mortgage in full rather than have it drag on (even if that is permitted by the mortgage contract). You don't necessarily have to get a decreasing term life insurance policy; just make sure that you have enough insurance to (a) pay off the mortgage right away instead of over 30 years, and (b) support your family. It is also worth remembering that family support will require less money per month. For many people, the mortgage payment is a substantial part of the monthly expenses.

Answer 3

Usually, the mortgage policies are pretty loose on the underwriting side... pretty much anyone who isn't terminally ill can sign up for them.

The downside of that is that the policy is expensive. The upside is that if you have risk factors that may result in a declination of coverage (high blood pressure, diabetes, are on SSRI drugs), you'll get a policy.

If you don't have those risk factors, just shop for a term policy.

Answer 4

I think you guys are confusing different kinds of insurance. There's mortgage insurance like you get from the lender to protect the lender. Then there's PMI, or the kind of insurance required by a lender if you don't put down 20% of your down payment to get a home loan. Then there's mortgage protection life insurance which is a private life insurance policy from any company who offers fully underwritten life insurance.

Mortgage insurance protects the lender and is based on current loan size. PMI protects the lender and is based on loan terms. Mortgage life insurance protects your family and based on your own terms.

As far as decreasing term life insurance goes, it's a relatively outdated policy. Instead, buy a term policy which matches both the mortgage size and duration, and each year (or every 5), simply call the insurance company to lower the face amount (coverage amount) to whatever your mortgage is in that year. You'll end up paying way less that way.

Last, if you buy a term policy and don't decrease the face amount, your family (or beneficiarie) keep the difference.