Does Credit and Mortgage Life Insurance Make Sense for Homebuyers and Homeowners?
After you buy your home or close a refinance loan, you will probably get inundated with offers for credit life insurance, also called mortgage life insurance.
In fact, many mortgage lenders will offer this to you at or before the closing of your mortgage loan. These mortgage lenders typically have an arrangement with credit life insurance companies to offer these products and receive a commission each time they are able to include it in your loan.
Credit life insurance companies and some mortgage lenders will offer this option as an advantageous program for you. They’ll tell you that it will make sure that your home is paid off and your family is secured if you die.
But in practically all situations, the mortgage life or credit life insurance policy is a bad choice for homebuyers and homeowners. Here’s why…
- Decreasing coverage. Credit life insurance is basically a life insurance policy that pays off the mortgage balance if you die. However, since amortization reduces the mortgage balance with each monthly payment, this policy’s coverage is actually decreasing.
- Paying more interest on premiums. If you roll the insurance coverage into your loan amount, you’re basically borrowing more money to pay the insurance premium — and paying interest on the premium.
- Doesn’t cover sickness. Credit life insurance usually pays off only if you die. If you are disabled or injured, and unable to work and earn a living, this insurance coverage will not pay your mortgage loan or save you from foreclosure.
Admittedly, there is one advantage to credit life insurance. It usually do not require physicals in order to get approved for coverage. But as long as you’re relatively healthy, there are other alternatives.
A Better Alternative to Credit Life Insurance
There’s a much better alternative to credit life insurance for most homeowners and homebuyers: term life insurance and disability insurance.
For the same amount of money (or less), you can simply obtain a standard life insurance policy that can probably give you greater benefits. More importantly, standard life insurance policies give your beneficiaries much greater flexibility on what to do with the money. Yes, they can use it to pay off the mortgage. But they can also use the proceeds to make other arrangements that may make better sense.
An even more important insurance policy to consider is accident or disability insurance. These policies pay you if you are ever injured or are unable to work. You can then use these payments to pay your mortgage loan payments, utilities, food and other bills, while you recover.
If you’re the sole or primary breadwinner for your family these type of “income replacement” insurance can be absolute lifesavers. Yes, they will take a bit more from your paycheck each month, but the security they offer can be immense.
