Does Mortgage Life Insurance Make Sense?

July 21, 2003 "My loan officer is suggesting that I protect my family by purchasing a life insurance policy that would pay off the mortgage if I die. I am the only breadwinner. Is this a good idea?" Not unless it is an incredible bargain, which is extremely unlikely. The greater likelihood is that it is overpriced. The mortgage is only one of the problems you will leave your family if you die too soon. As the only breadwinner, you have to be concerned with where they will get their bread, medical care, education, and much more. Planning for your death is a good idea, but the insurance decision should be based on your family�s total needs, not just the mortgage. A term policy is the best way to provide adequate protection covering all your needs. Term policies furthermore, pay cash, which leaves your family with maximum flexibility. Mortgage life insurance pays off your mortgage, whether your family wants to use the cash that way or not. It is possible that you already have enough insurance to cover your family�s other needs, and all that is required is enough additional coverage to take care of the mortgage. In that event, take out a term policy large enough to cover the mortgage. The market for term policies is extremely competitive and you can shop among carriers. When you buy a mortgage life policy through your lender, in contrast, you have no opportunity to shop. The upshot is that a mortgage insurance policy will probably cost more than a term policy. This is despite the fact that the coverage of the mortgage insurance policy declines as the loan balance is paid down, and disappears completely if you refinance. Copyright Jack Guttentag 2003

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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