What is Mortgage Life Insurance?

The pitch is typically delivered on a postcard that arrives in the mail.

Look closely - it's most likely from your bank, not your insurance agent.

The come-on: If you die (sad music in the background), your family will be forced out of their home if they can't make the mortgage payment. Ah, but wait. A mortgage life insurance policy can put that fear to rest because, when you die, the policy takes care of the mortgage.

Sounds like a great product, right?

Lending industry executives give a resounding "YES" to that question, while those without a vested interest, such as the experts at MotleyFool, caution that, generally,mortgage life insurance isn't necessary, and here's why:

• It's not a good idea to buy any type of one-issue insurance, such as for babies, a single disease, or to pay off the mortgage.

• Your family will have additional expenses, aside from the monthly mortgage payment, in the event of your death. Perhaps taking care of higher interest debt will take priority over paying off the mortgage. Your family doesn't have this choice with mortgage life insurance. The payout goes directly to the lender.

• The value of the mortgage life insurance policy decreases the longer you own it. This is because the insurance company is only on the hook for your loan balance, which decreases over the years, as you make mortgage payments. So, while you'll pay the same premium, the policy payout amount decreases.

Forbes Magazine lists mortgage life insurance among the 15 insurance policies you don't need. The magazine recommends, instead, a good term life insurance policy.
With term life insurance, if you die within the specified term of the policy – typically 10, 15, 20 or 30 years – the policy's beneficiary gets full face value, and the money isn't taxed. The beneficiary, not the bank, determines how best to use the money.
What if you don't die? In that case, the policy ends and you can purchase a new one. While the biggest benefit of a term life policy is its low cost, a second policy will be more expensive. The biggest drawback to term life policies is that there is no face value as there is with a whole life policy.

If you can't obtain life insurance – perhaps you're in poor health – then mortgage life insurance may be a good product for you, according to the Wall Street Journal's Aleksandra Todorova. Blood work and medical tests aren't required to qualify for a policy.
That said, there are usually exceptions to rules, so when reviewing a mortgage life insurance policy, check carefully for a pre-existing condition clause that may be hidden in the fine print.

When considering the purchase of any type of life insurance, it's a good idea to consult with your insurance agent. Ask for a needs analysis – an assessment of your particular circumstances. This helps you determine how much – in dollars – life insurance you need. Once you know that, you'll be able to better compare the different types of life insurance available and the various rates.

Information and service provided by Katie Oakes with Keller Williams Premiere Properties.