Life Insurance: Is Mortgage Protection Your Best Option?

When you are first starting out and you don't have many assets beyond the home you just bought, life insurance mortgage protection might seem like the best option. However, it is often wise to look around and see what other life insurance benefits you may need. Even if you don't need them now, you should anticipate what you might need down the road.

What Is Mortgage Protection?

Mortgage protection is credit life insurance purchased directly from your mortgage lender or separately from your insurance agent that pays off the mortgage in the event that you die before the home is paid off.

Advantages of Mortgage Protection

The cost of mortgage protection can be included in your monthly mortgage payment so you don't have to worry about missing a payment. If you die unexpectedly, the principal loan balance is paid off so that your family does not lose the home.

Disadvantages of Mortgage Protection

The cost of this kind of protection is based on the amount of coverage that you need, and can be extraordinarily expensive. In addition, the beneficiary is the lender, not your heirs, so the money goes directly to the bank.

Other Options

Rather than spending a lot of money on mortgage protection that only protects you to a limited extent, consider investing in a whole life or universal life policy that can build cash value, will pay a death benefit directly to your heirs, and can include credit life insurance that will pay off all of your loans, not just your house.

The money you invest in a whole life or universal life insurance policy is tax deferred. The death benefit paid to your heirs is typically not taxed. Additionally, if you have a difficult financial period, most of these policies have flexible payment terms and payments can be made by deducting the premium from the cash balance.

Another advantage of a whole life or universal life policy over that of basic mortgage protection is that you can borrow against the cash value of your life insurance without having to pay taxes on the money or incur tax penalties. The loan you take against the cash value can simply be deducted from the death benefit when the claim is processed.

A Word of Caution

Experts in the insurance industry advise their clients to never purchase credit life insurance through credit card companies or mortgagors because of the high cost and low benefit. Always seek the advice of your insurance agent and find out what options there are given your circumstances. You can save a lot of money in the long run by doing some short-term investigating at the start.

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