Mortgage life insurance has been around for decades. It was renamed to help boost sales of decreasing term life insurance. Decreasing term life insurance was a product designed years ago with the philosophy that as a person repays their debts they should not need as much life insurance. Therefore it was acceptable to decrease the face amount left to the beneficiaries with time. In the 80s, as Americans became more and more in debt and age has very little to do with becoming debt free, sales decreased on these products. Life insurance company marketing departments took the old product and put it in a new wrapper called Mortgage Life Insurance or the popular Credit Life Insurance products.
The aggressive marketing program on these products is astounding. It begins once a person closes on a new house or refinances their house, the game begins. The mailings are almost nonstop. These mortgage life insurance companies pay mortgage companies to use their letterhead and logos to “trick” the new home buyer into thinking this is important because it came from my mortgage company and I assure you your mortgage company has no idea that you even received this mail piece. The new home owner fills compelled to open this “official looking” letter and many fall for it and return the card. This begins as process of lead companies that sell the new home owners information to scores of mortgage life insurance agents who are on the phone immediately to sell this wonderful important product. However, if you were called and an agent explained that as you pay off your mortgage the life insurance benefit decreases because it is really decreasing term life insurance and your family does not get the difference you probably would not buy it.
The second way mortgage life insurance companies repackaged decreasing term life insurance is called credit life. Credit life insurance is popular in the auto industry. When you purchase a car and finance it, you are pressured into purchasing credit life. This salesperson is paid to guilt you into this life product by telling you if you should die your car note will be paid in full. Here is what they don’t tell you. On a 48 month car note the odds of you dying in that 4 year span are astronomical. Even if you died 3 years in, the car is almost paid off, so the beneficiary (bank) is paid the difference. Your loved ones own a car, no cash.
So, consider this instead. Purchase a term life insurance policy for the same period of time as your mortgage. For example, if you have a 30 year mortgage of $200,000, buy a 30 year term life insurance policy for $200,000. The premiums will be very close to the same as the mortgage life insurance plan you considered, but here is the difference. Let’s say you die at year 20 and the mortgage debt is now $100,000. Under mortgage life insurance, the beneficiary (bank) is paid $100,000 and your family owns the house. With term life insurance the beneficiary (your spouse/family) is paid $200,000 tax free, they pay off the mortgage of $100,000 and own the house, plus they have an additional $100,000 to keep.
“Caveat emptor– let the buyer beware”
Image courtesy of Danilo Rizzuti at www.freedigitalphotos.net
Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger and team leader with over 27 years of experience in sales and marketing in the insurance and beverage industries.
Many people who already have life insurance policies may wonder exactly why they would buy mortgage life insurance. After all, their beneficiaries will already be receiving a large sum of money from the regular life insurance policy when they die. While this is true, and many people use benefits from regular life insurance policy to pay off their mortgages, others don’t want to use up the benefits. If you had a mortgage life insurance policy in effect when you died, your beneficiaries could use all of the benefits that they would receive from a regular policy for other things. The mortgage debt will be satisfied, and then they can use all of the money from the regular life insurance policy on other things. .
Lynn, we are in agreement on not using existing life insurance to pay a mortgage debt. My point is purchasing another term life insurance policy just to cover the mortgage and give the difference to the family versus a decreasing term that defaults back to the life insurance company. Never had a widow turn down a check yet.
The benefit to mortgage life insurance may be greater, depending on the issuing carrier. Often, mortgage life carriers will reimburse the premium if the policy is taken to term. Meaning, you must pay off the house at the contracted repayment rate, but you will get your premium returned. Something term life does not provide.
Second, most mortgage life and credit life insurance policies have limited health questions and will NOT require a physical. If applying for a $200,000 term life policy, get ready for the full work up in today’s environment.
Third, credit life is a fantastic option for short term coverage on an automobile under two conditions:
1. You do not have any life insurance in place and your spouse can not afford to pay for the car without you.
2. You are co-signing on a car loan for a child and have not taken this new debt into account on your existing life insurance set up. If you spouse is the beneficiary on all other policies, a credit life coverage on an auto policy would pay the car off for your child, and leave them the car.
Finally, credit life/decreasing life/mortgage life, may not always, but may often provide a small cash payout(unearned bank interest) in the event of death, as the interest is figured into the face value calculation up front. This is often times NOT a windfall, but generally provides enough to pay transfer fees or any necessary taxes in relation to the death of the other party.
Keep in mind, each situation is different. If someone tells you something which sounds too good to be true, it usually is. Insurance is not about making money, but rather protecting the money you have/will have.
why don’t you just come out and ask us do you prefer decreasing term or universal policy to talk about you want talk about mortgage protection
Why not just a term life for the term of the mortgage?
Trevor, you make some valid points, certainly decreasing term is more liberal than straight term life with simplified issue, however there are numerous carriers with simplified issue under $200k. as far as earning interest in this low interest environment, most would pay 1% or less. If there was interest earned that is subject to tax, where as term life in tax free. On credit life on a car note, a car is a fast depreciating asset, term life is always a better choice. Is there a market for decreasing term, absolutely. I am always cautious when products are repackaged because sales are declining. Thank you for sharing.
Also, there are plenty of people who buy more than one home. Also, I just checked (on a quote engine) the difference that having a 10- or 20- or 30-year product has for a 34 yo M, for $250,000. The % increase is large, but the $ increase isn’t: $12, $18 and $27.
Fred, thank you for sharing that. The quote difference is almost nothing.
The bottom line is that the buyer always needs to understand the product he/she is buying. Different situations require different solutions so thee is not a cut and dried methodology. That said, term life is a good buy for the money but needs to be structured properly. The insured should always name their own beneficiary and it should not be the lender. (I have seen banks sell term life and name the bank as the beneficiary). Therefore the policy should be collaterally assigned if the lender is requiring some form of life insurance (mortgage term, mortgage cancellation, whatever you want to call it), this way the lender only receives the amount of money needed to pay off the loan and the balance goes to the beneficiary of the insured. A much better option!!!
Secondly, a good level term policy will nearly always be cheaper than “credit life” or “mortgage cancellation” insurance sold through the lender. Yes, in some situations, it is best to take the policy offered by the lender if there are major health problems; but generally an underwritten policy will develop lower premiums.
Thirdly, only use term products that offer living benefits that will advance a portion of the death benefit if certain triggers occur for critical illness, chronic illness, and/or terminal illness. Statistics show that 7 out of 10 people will suffer either a heart attack, stroke, invasive cancer, or a major illness such as MS, ALS, MD, major organ failure and still live to age 65. A traditional life policy will not help, but one with living benefits can provide some much needed dollars at this time of need and still pay a death benefit later.
Competitive indeed. I do think it is imperative that clients understand the differences between bank mortgage insurance and doing a comprehensive needs analysis and applying for some individually owned term insurance.
Very points made Joel and Dave. Thank you for sharing them.
Outside of being a marketing term to sell term insurance it’s traditionally was a decreasing term policy. However with competitiveness of level term insurance it sometimes it’s a lot cheaper just to buy a level term policy your family would keep the difference between the amount owed and the actual death benefit. With interest rates as low as they are it may be wise to not pay off the mortgage but to invest the money into get service
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Life Insurance? – | Life, Annuities, Disability, Long Term Care,
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Thank you!