Owning a home means having a little piece of the world where your family can grow – a place that is finally your own, where you’ll have countless get togethers and raise your family.
It is also a cornerstone of your family’s financial future because it’s a substantial asset that’s likely to grow. But even the best-made plans are not certain, so homeowners need a way to protect their mortgage from falling to their partner or a co-signer if they were no longer around.
The second I closed on my home, I received a letter in the mail every day warning me that I needed to buy mortgage insurance. As someone who works in the life insurance industry, even I had moments of doubt that I was throwing away an important piece of mail. (Also, any letter that’s red and includes all caps text scares me.)
Mortgage insurance is very different from term life insurance, so it’s important you understand what kind of coverage is being offered to you and what you actually need. Here, we’ll help you understand the difference between these two types of coverage and, most importantly, how you can keep one of your most costly assets from becoming a financial burden.
Keep your home from becoming a significant liability
Until it’s paid off, there’s plenty of financial risks built into your mortgage. If you can’t make the monthly payments, for example, your bank could sell your property to cover its losses. That’s why many homeowners enter a mortgage with someone else – like a spouse, partner or parent. Often, this person is helping limit the financial risk of buying a home.
But, what happens if you were to pass away too soon? Your co-signer could end up facing that financial responsibility alone. If that happened, it could undermine the stability you have worked so hard to provide. Enter, term life insurance.
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Term life insurance vs. mortgage life insurance
There are significant differences between term life insurance and mortgage life insurance policies, and it’s important to know what you’re getting before buying coverage.
If you’ve recently closed on a new home, your mortgage company may be sending offers for mortgage life policies to protect your loan. But a mortgage life policy is not the same as term life insurance. While seemingly convenient to purchase, this type of policy can leave your family underinsured if you don’t have supplemental term life insurance coverage.
A mortgage life policy would pay your lender the balance of your mortgage if you died before paying off the loan. It’s also a simplified issue policy, which means none of your health information is taken into consideration with your pricing. Therefore, you could be paying more for less coverage because the pricing isn’t personalized to you. For example, according to State Farm, a 30-year, $250,000 mortgage life insurance policy would start at about $58 for a healthy 30-year-old man. That same man could buy a 30-year, $500,000 medically underwritten term life insurance policy, which would offer more financial protection for his family, starting at $34 per month. (Get your own personalized life insurance quote here.)
Additionally, these policies aren’t as flexible as term life insurance policies. The coverage you can buy typically maxes out at the amount of your mortgage and the length of the loan. If you purchased a $200,000 house with a 20-year mortgage, that’s the maximum protection you can buy. And, mortgage life insurance may have more exclusions than term insurance about what types of deaths qualify for the payout, so it’s important to read the fine print.
Term coverage offers flexibility, personalization and additional financial protection that you can’t get from mortgage life insurance. You get to choose your coverage amount, and you get to decide who would receive your coverage if you died while the policy was in effect. That recipient, or beneficiary, could then decide how to spend the coverage to best protect your family, rather than having your coverage go to your mortgage lien holder.
How to use term life coverage to protect your mortgage
When you buy term life insurance, you get to choose a coverage amount and a term length that meet your family’s needs. If mortgage protection is your primary goal, choose a coverage amount that would pay off your mortgage and a term length that’s at least as long as the life of your home loan. For example, if you owe $500,000 on a 30-year mortgage then a policy in that amount would likely fit your needs. For a healthy, 30-year-old man, that policy would start at about $34 per month.
But for most families, there’s more financial protection needed than merely an amount that covers your mortgage. You should consider income replacement for both spouses, day-to-day bills, and the cost of childcare and your children’s education… to name a few of our many financial responsibilities.
Flexibility is one of the significant benefits of a term life insurance policy. You can purchase coverage that not only helps protect your family from needing to pay off a mortgage without you but, can also help ease the financial burden of day-to-day life.
Not sure how much is needed for “day-to-day” life? No problem. A life insurance calculator can look at your income, family structure and debts to help determine the right policy for your needs.
How much should term life insurance cost?
The younger and healthier you are, the more affordable your term life coverage will be.
For example, a healthy 30-year-old woman can purchase a 20-year, $300,000 policy starting at $19 per month. Prices will vary based on your age, health, term length and policy amount, but, for the most part, it’s much more affordable than a mortgage life insurance policy is. And, that coverage will remain the same over the course of the 10, 15, 20 or 30 years you choose.
To find out how your term life policy would fit into your monthly budget, estimate your rate. It’s free, comes with no obligation and takes less than a minute.
Finding the right coverage
It’s easier than ever to secure high quality and affordable term life insurance coverage. You can apply for a policy entirely online, and, if approved, start coverage today. Yes, you can even accomplish this from your couch, in your pajamas.
Top quality coverage is essential
You wouldn’t buy a new home without a home inspection, and you should also do a little digging before settling on a new policy. Life insurance company ratings help indicate the financial stability of the company who issues your policy. Companies with higher ratings are more likely to fulfill their responsibility to pay out a claim if anything happened to you.
A policy is only as good as the paper it’s written on, so before buying one, check to make sure the ratings are up to your (hopefully high) standards.
(P.S. our Haven Term policy is issued by MassMutual, which has earned A.M. Best’s top rating of A++*.)
Even the American dream needs some protection
Whether it’s a condo, a co-op, or a place in the suburbs with a lawn to mow on Saturday mornings, your home is more than just four walls and a roof. Even if it’s a work in progress or a starter home that you plan to sell in a few years, protecting your investment is a must.
If you died way too soon, you wouldn’t want your family to struggle with the house payment and risk losing the stability and the financial benefits that your home offers.
Term life insurance offers a flexible, affordable way to protect your mortgage so your family home can stay right where it belongs. With your family.
*Ratings are as of November 1, 2017, and are subject to change. MassMutual has also received other ratings from different rating agencies.