Mortgage life insurance guarantees to cover a mortgage should the borrower die before the loan is paid off, but this specialized form of life insurance has diminishing returns and limited benefits.
Critics describe the product as “declining benefit insurance” because mortgage holders pay a set premium for the life of the mortgage, even though the balance of the loan steadily decreases as does the value of the potential payout, according to www.Bankrate.com.
Mortgage life insurance also lacks the flexibility of traditional life insurance, which pays out to the beneficiaries named on the policy. Mortgage life insurance payments go directly to the lender. Heirs are left with a house free and clear of the debt, but paying off the mortgage might not be their best financial option.
The policies may hold advantages for people who have health issues making it difficult for them to obtain traditional life insurance. Most mortgage protection insurance is offered on a “guaranteed acceptance” basis, said Bankrate.
“Overall, mortgage life insurance doesn’t seem like a great idea for most people,” said the website http://cashmoneylife.com. “You pay the same amount of money each month for a decreasing benefit and you have no control where the payout of the policy goes or how it is used.”
Some policies provide coverage in case the mortgage holder becomes unemployed or disabled, but these benefits typically expire after a year or two and may require a waiting period before payments begin, according to www.Bankrate.com.