When buying a property with a residential mortgage (loan), you may be bombarded with solicitations from various companies offering you “mortgage life insurance” that offers to pay-off your mortgage if you or your spouse dies.  These policies are usually much more expensive than a term-life policy and decline in value over the term of your mortgage.

The mortgage life insurance policy usually declines in value as you pay down your mortgage, so the value in 25 years (if you have a 30 year mortgage) is worth much less than if you died 2 years into the policy.  This type of policy usually becomes worthless once you have paid off the mortgage.  And if you die, the bank gets the pay-off; your beneficiary gets the deed (what happens if the house has become worthless?) The policy may not pay-off for the first 5 years until you paid enough to the insurance company, so double-check before you sign up for this type of mortgage life insurance.  If you sell the property, refinance the mortgage, get a 2nd mortgage or home-equity loan, the policy may terminate with no remaining value!

A better solution for many people (especially young healthy people under 30 years) is a term-life insurance policy.  This type of policy is a fixed-benefit type of policy meaning that the value doesn’t change over time and worth the same on day 1 or the last day of the policy (10, 20, 30 year policy, or any number of years).  At the end of the term, the policy expires and becomes worthless.  If you die before the term ends, then your beneficiary gets the value of the term-life insurance policy to payoff the mortgage, help with the funeral or do whatever with the money (if the house becomes worthless, your beneficiary can go buy a new house with the insurance money and leave the worthless property to the bank).  The insurance payout may be tax free money to the beneficiary!  This type of fixed-term life insurance policy can be found for about $10 per month for $200,000 worth of life-insurance.  And the policy goes with the person and IS NOT tied to the property or mortgage!  As long as the premiums are paid, the policy usually remains in place.

Many insurance agents and investment advisors will offer “universal life” or “variable life” or “whole-life” policies.  These may or maynot have a cash value at the end of the term.  But most likely, you’ll be better off buying term life insurance and investing the difference (or save for a rainy day) to pay-off your mortgage or invest in a good stock like Coca-Cola or Home Depot.  If you are a high-earner (over $200,000 per year), then this type of policy may provide tax savings and benefits.

Any insurance policies that you fail to pay usually will terminate immediately.  Any of the “cash value” may be converted to pay the premiums until you:

  • 1) Repay the missed premiums (with a penalty) or
  • 2) The “cash value” is converted to payments to the life insurance company until the policy value is exhausted, then the policy will terminate (leaving you with NOTHING!)-BEWARE!

Consider that you may become jobless sometime during the mortgage period and if you fail to pay the premiums, the policy may become worthless….   You should consider which insurance policy will allow you to cash-out (the policy or the stocks you bought with the savings) with minimal tax or legal penalty to help you survive during the joblessness?  Or did you save the difference and put it into a rainy day fund to carry you through the joblessness?

Most of these scenarios have significant tax penalties (except for the rainy day fund) and you should consult with a CPA or certified financial planner (pay by the hour) to get unbiased advice.  Also check with your insurance agent and get quotes from several sources.