Here’s one more thing to think about: Does it make sense to use the money to pay off the entire mortgage right away? Not necessarily. “Perhaps your surviving family could have eliminated the mortgage by selling the house and moving to a smaller or less expensive home. Alternatively, they might prefer to use the life insurance proceeds for other purposes and continue making mortgage payments, avoiding early payoff penalties and not having to worry about other expenses. Those options are not available through typical mortgage insurance from a lender like a bank, trust company or credit union.”
Is life insurance worth it?
Individually owned life insurance tends to be cheaper than mortgage insurance. In some cases, it’s significantly less expensive than mortgage protection insurance from a lender. “The tax-free proceeds can remove a huge financial burden from the shoulders of the family you leave behind,” says Wouters.
Plus, people often have other needs besides paying off a mortgage, like providing income for a surviving spouse, home maintenance, education for your kids—all of which life insurance can cover. “If you have plenty of other assets and investments that wouldn’t trigger any taxes on your death, your spouse is working and earns even more than you do, and your survivor would move to a less-expensive home if you passed away, then having extra life insurance may not be as important,” says Wouters. “A growing number of people in their 60s and 70s have a mortgage and no heirs, or have heirs to whom they don’t want to leave much. The house would be sold on death, and whatever is left after the mortgage and other expenses are covered goes to the heirs. For those people, life insurance may not be as important a consideration when looking at paying off the mortgage.”
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Are coverage and fees affected by what’s left owing on a mortgage?
Mortgage protection insurance through a lending institution like a bank, trust company or credit union typically provides decreasing coverage to match the decreasing outstanding mortgage. However, the cost remains the same. “You are paying the same amount of money for something that is going down in value,” says Wouters. “If a mortgage is renegotiated, renewed or moved to another mortgage provider, you may have to reapply for coverage, and the cost will go up because you’re older and may not be as healthy as you once were.”
Remember that in the early years of your mortgage, most of your mortgage payments go to interest charges. “You’ll need most of the coverage on renewal of the mortgage,” says Wouters. “Your age and health may drive the cost up more than the reduction in the amount of the outstanding mortgage at the time of renewal or change.”
So, what happens with your payout if you die with a small amount left on the mortgage? For example, are you paying premiums on a $500K mortgage for 10 years, and your family is only paid out for what’s left on the mortgage at the time of death?
With mortgage protection insurance offered by a lender, the amount of coverage is about the same as the amount of the outstanding balance of the mortgage. “Your rates, at best, have remained the same while the coverage amount has been dropping regularly,” says Wouters. “With life insurance offered through a life insurance company, your payments remain the same for the length of the term of coverage. The coverage remains the same, too.”
If you name a beneficiary on the life insurance policy, then they pay off whatever is left on the mortgage and keep the rest to pay off other debts, or provide cash for other needs and an income stream.