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Executive Summary

Whether you’re a first-time home buyer, or purchasing a vacation property, if you have a mortgage your lender will encourage you to purchase mortgage insurance.

Like every other life insurance policy, a death benefit will be paid if the insured person dies. Mortgage insurance is usually not the most cost effective and flexible way to protect your assets and family. In almost every case there are less expensive policies than those offered by lenders.

What you need to Know

As time passes and you dutifully make your mortgage payments, in addition to servicing the debt by paying interest, you are paying down the outstanding amount of borrowed capital. Mortgage insurance will pay a death benefit equal to the amount of outstanding debt. That is, each time you make a mortgage payment, or even an annual lump-sum payment you are lowering the amount of your death benefit.

Both borrowers are typically listed on the mortgage insurance, in a “first to die” arrangement, meaning that if either borrower dies then the benefit is paid. That is appropriate for some couples, but not necessarily all, and it makes those policies more expensive. You may be paying for insurance that is unnecessary, especially if a traditional bread-winner, care-giver arrangement is in place, where one partner works outside the home, and the other dedicates their life to working in the home. If the non-earning partner passes away, some additional costs may arise for childcare, but the continued income from the other partner is still available to make mortgage payments.

More importantly, ‘regular’ insurance (universal life, whole life, term life) purchased with the assistance of a licensed insurance professional, it can be integrated with your overall financial plan. The right type of life insurance can be purchased, and depending on age, health, and other risk factors, the most economical provider can be accessed.

The Bottom Line

Mortgage insurance pays off your loan, directly to your lender. Insurance you purchase personally pays the death benefit to your named beneficiaries. The beneficiaries will then have freedom, they decide whether it is best to pay off the mortgage, and when.

And during the life of the policy, premiums compared to benefits are lower when you avoid mortgage insurance from lenders.