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Mortgage protection insurance vs. term life insurance

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In 2020, the number of homeowners increased by approximately 2.1 million. As Pew Research Center puts it, Americans have been on a homebuying spree. For many people, owning a home is part of the American dream. It can also be a major source of stress.

Many factors can prevent a family from being able to make mortgage payments. When this happens, foreclosure becomes a real possibility. According to CNBC, COVID mortgage bailouts kept foreclosures at bay for some people, but now that those protections are ending, foreclosures are surging again. In the third quarter of 2021, foreclosure starts increased by 32 percent.

Although foreclosure can be the result of many different events, a common scenario involves the death of a family member. If a breadwinner dies, the remaining family may not be able to keep up with mortgage payments and other bills. If a stay at home parent dies, the surviving spouse may struggle to cover childcare responsibilities while maintaining a job. Medical bills and funeral costs can add to the financial problems.

Homeownership is a big investment, so it makes sense to protect that investment. Mortgage protection insurance and term life insurance are two common ways of securing the protection you need for your mortgage. Here’s a look at how the two options compare.

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Term Life Insurance

Term life insurance is a type of life insurance policy that is designed to cover a predetermined period of time. In this way, it differs from permanent life insurance policies, such as whole life insurance and universal life insurance, which do not have an end date and can be maintained until the insured’s death. Term life insurance policies tend to be more affordable than permanent life insurance policies.

The main feature of term life insurance is the death benefit, which is paid to the beneficiary if the policyholder dies during the period of coverage, subject to the terms of the policy. The amount of the benefit can range significantly, from as low as $10,000 to as high as $500,000 or more. Some policyholders purchase a small death benefit to provide for final expenses only, while other policyholders purchase a large death benefit to provide loved ones with enough money to cover several years of lost income.

When calculating how much life insurance you need, you should consider your reason for purchasing coverage. For example, if you want to replace lost income, you can multiply your annual salary by the number of years you want to replace. Alternatively, you can add up the costs you will need to cover, including the mortgage, other bills, debt, and future childcare or education costs, and subtract any other resources that will be available.

This benefit is typically paid in a lump sum, and it can be used in any way the beneficiary sees fit. For example, the beneficiary might use it to pay off a mortgage. The benefit could also be used to cover medical debt and funeral expenses, to replace lost income, to finance a child’s education costs, or for other purposes.

Mortgage Protection Insurance

As the name suggests, mortgage protection insurance is designed to provide coverage for the policyholder’s mortgage. Like life insurance policies, mortgage protection insurance policies will typically pay out if the insured dies while the policy is in force. The benefit may be paid directly to the mortgage lender.

However, similar insurance policies may be available with different terms. Some insurance companies may provide mortgage coverage that pays out if the policyholder becomes disabled and unable to work. This may be called mortgage disability insurance.

Should You Buy Mortgage Protection Insurance?

Mortgage protection insurance may give peace of mind to the right policyholder. However, it may not always be the best way to secure protection. When deciding on what’s right for you, ask yourself the following questions.

  1. Do you already have, or can you get, the protection you need through other insurance products? For example, if you already have a term life insurance policy with a death benefit that is substantial enough to cover your mortgage, you may not need mortgage protection insurance. Disability insurance is another product to consider if you are worried that an illness or injury could drive you into foreclosure.
  2. Are your worried about costs other than the mortgage? Mortgage protection insurance provides very focused protection. This may be great if you just need a little extra coverage specifically for your mortgage. However, if you are worried about other expenses and lost income, mortgage protection insurance may not provide sufficient coverage.
  3. Would you be better off stacking life insurance policies? You can have more than one life insurance policy. Let’s say you already have a policy that you purchased to cover your final expenses and provide for your family. Now you’ve purchased a house, and you want additional coverage for the mortgage. You could decide to purchase mortgage protection insurance. Alternatively, you may be able to purchase a second term life insurance policy in the amount of the mortgage.
  4. Do you want the benefit to go directly to the mortgage lender? With mortgage life insurance, this is common. With term life insurance, the benefit will go to the named beneficiary, who will decide how to use it – for better or worse.
  5. Are you dealing with a life insurance coverage denial? If you cannot secure approval for life insurance because of your medical history or current health conditions, you may have an easier time purchasing mortgage protection insurance.

Selecting the Right Coverage for Your Needs

Insurance policies can be complicated, and everyone’s situation is different. It is possible that a mortgage protection insurance policy is exactly what you need. It is also possible that a term life insurance policy meets your needs better by providing broader and more flexible coverage.

Keep in mind that the policies offered by one insurance company may not be identical to the products offered by another insurance company. It is important to compare your options carefully so that you can select the best coverage options for your needs. If your needs change – for example, if you get married, buy another home, or have children – you may need to reassess your coverage options. A licensed insurance broker can help you with this process.

Need Life Insurance guidance? The Higginbotham life insurance team takes time to fully understand your needs and help you make an informed buying decision. Contact us to learn more.

Not sure where to start? Talk to someone who wants to listen.

A great plan starts with a conversation. Let’s talk about what you need.

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