One of the most particular types of life insurance is mortgage life insurance. It is an insurance that many banks require mortgage applicants to subscribe. The objective is to cover the bank against the possible death of the client taking the mortgage. If that death occurs, the insurance gives the bank compensation that serves to cover what remains to be paid on the mortgage.
In this article we offer you all the necessary information so that you know how life insurance linked to mortgages works. If you are looking for financing to buy a real estate property, it is important that you take into account all this information.
Mortgage Life Insurance: What They Are
Mortgage life insurance is a special type of life insurance. Unlike other insurance products, they are not designed to give a guarantee of peace of mind and future to the insured, but respond to a requirement of the banks that grant mortgages.
A mortgage on a real estate property is one of the products with more uncertainty of those marketed by banks. They are usually very high amounts and have very long repayment terms, even many decades, so there is a real risk that the mortgage holder dies before finishing returning the money to the bank. To have the guarantee that this mortgage will be returned, many banks force their clients to take out life insurance whose beneficiary is the bank itself: if the client dies before having paid the mortgage, the bank will cover what is missing with the execution of the policy.
In cases of serious incurable diseases, with diagnoses of life expectancy of less than one year, there are insurances that pay the compensation still in life of the insured, so that he can pay the mortgage himself before dying.
Some of these insurances also pay compensation in the event of a situation of permanent disability that prevents the mortgage holder from having income.
In those circumstances, the insurance would also take care of the part of the mortgage loan that remains to be repaid to the bank.
Thus, mortgage life insurance, or linked to a mortgage, has only one mission: to return the mortgage money to the bank in case the mortgage holder cannot do so because he has died or is physically disabled.
Therefore, if you are thinking of taking out a mortgage to buy a home, premises or other type of real estate, it is very likely that your bank will require you to take out one of these insurances. Remember that you can refuse to take out this insurance, but that could complicate the granting of the mortgage and most likely the bank will force you to sign documents in which you expressly waive this coverage.
If you are going to accept the contracting of the mortgage with life insurance, you must know what its main elements are and how they differ from the components of conventional life insurance.
- Premiums. Monthly mortgage life insurance premiums are calculated based on the mortgage to be repaid. The higher the credit, the greater the risk and, therefore, the higher the premiums. However, as these insurances are contracted for a certain term equivalent to the duration of the mortgage, the premiums are usually not too expensive. Premiums are usually added to monthly mortgage payments.
- Beneficiary. In mortgage life insurance, the beneficiary is always the bank (or banks in cases of pooled loans).
- Indemnity. The compensation – or death benefit – is the amount of money that the beneficiary, that is, the bank, will receive in case the mortgaged person dies. At all times, the compensation will be equivalent to the amount that remains to be repaid from the mortgage, so that, unlike other insurance, the benefit is reduced as time passes and the loan terms are paid.
- Term. The term of such a policy must exactly match the duration of the mortgage. That is: at the moment the last term of the loan is paid, the life insurance is extinguished and ceases to be valid. In this sense, mortgage life insurance is a special type of term life insurance, which also has a specific validity.
- Customization. Although mortgage life insurance is designed to cover the risk of the bank, some companies offer to customize the insurance, so that, paying a little more, additional benefits are obtained. With these extras, in addition to complying with the bank’s requirement, the insured can obtain advantages such as coverage for children if the parents die, compensation for beneficiaries designated by the insured or compensation in cases of traffic accidents or others. If you are going to take out mortgage life insurance, check with your insurance company what extras may be available to improve the base insurance.
How Mortgage Life Insurance Works
As you have seen, the elements of mortgage life insurance present quite a few differences with respect to conventional life insurance. To a large extent, it resembles term or term life insurance, but with important changes in its conception and, above all, with notable differences compared to permanent life insurance.
The most striking of these differences is that in mortgage insurance, as you pay off the loan, the death benefit is reduced. That is to say: the amount of the compensation is accommodated to what remains to be paid of the mortgage. However, the premiums remain the same.
On the other hand, the qualification process also differs quite a bit from conventional insurance. In reality, since the bank requires insurance, there are virtually no restrictions on applying for insurance. In that case, mortgage life insurance resembles term insurance, which also has few requirements when it comes to qualifying for life insurance.
With these life insurances, it is enough to be within a fairly wide age range to get the qualification and the policy granted. This means having significant coverage without suffering the underwriting process.
After you take out the insurance, it becomes part of your mortgage. That way, you’ll pay premiums as you repay the loan and usually integrate with it. This means that the price of the insurance is added to that of the mortgage, making it more expensive.
However, you have no legal obligation to take out mortgage life insurance. It is a requirement of the banks that you can refuse, although if you refuse you may have problems obtaining the mortgage and your bank will force you to sign documentation that justifies your waiver of insurance.
Advantages and Disadvantages of Mortgage Life Insurance
Starting from that idea that mortgage life insurance is not mandatory, you should assess well if you are going to hire it together with your mortgage. In that case, you have to assess very well the advantages and disadvantages offered by these products. Among the advantages, we must highlight:
- Facilities to qualify. They won’t ask you for medical exams, or ask you questions other than your age. That is a great advantage when purchasing life insurance, because the qualification process is practically non-existent. If you haven’t qualified for term insurance, for example, you can use mortgage life insurance to protect your property and ensure that if you die, your family will still have the mortgaged home.
- Safety for your partner. In many cases, the mortgage is in the name of both spouses. If one of the two dies, the other must face the entire loan, which can be very difficult. With mortgage life insurance, the deceased spouse’s portion of the mortgage is covered by the policy, and the couple’s survivor continues to pay only his or her share.
- Coverage in case of disability or terminal illness. Many mortgage life insurance policies offer compensation in case the insured person has a health problem that leaves him disabled, or if he has a terminal illness with a very reduced life expectancy. In this way, in reality, the benefit can be collected without the need for the insured to die.
On the side of the disadvantages, we find several problematic points that make these insurance options less attractive:
- Decreasing profit. Perhaps the biggest disadvantage of these insurances is that, as time passes and the mortgage loan is paid, the compensation decreases until it reaches zero. That is, the benefit decreases despite the fact that the insured has paid their premiums.
- The beneficiary is the bank. This type of insurance usually does not benefit the successors of the insured who dies, but the bank. In return, the successors – usually the family – will have a real estate paid for and free of mortgages.
- Higher price. As the premiums are fixed but the benefit is decreasing, the truth is that the premiums are much more expensive than in other life insurance.
As you can see, the disadvantages are important. Therefore, if you are obliged to take out mortgage life insurance, it is best to cover yourself by also taking out other life insurance, either term or permanent, which serves so that your family and loved ones also receive a benefit with which you can face other expenses, not only the mortgage.