We speak to a lot of clients who are looking for mortgage protection life insurance. Basically, this is life insurance that would provide enough money to the beneficiary to pay of the deceased’s mortgage. Many of the programs out there will offer life insurance with a decreasing benefit to go along with the decreasing mortgage amount. We recommend staying away from these products as the cost doesn’t go down, but your benefit does. To cover this type of single issue you have many different options with life insurance products.
Example 1: You just bought a house with $250,000 mortgage and the term is 30 years. You can take out a straight 30 year level term that will run out when you presumably payoff the mortgage in 30 years. Obviously, few people know where they will be in 30 years, let alone in the same house. Any way you slice it, you will at least have protection for your heirs of $250,000 for a full 30 years. In year 31, the term premium will skyrocket and most people will drop it.
Example 2: Return of Premium (ROP) is a very popular product these days for mortgage protection. Just take the same $250,000 mortgage with a 30 year term, and buy a 30 year ROP. This product will return all of the premium to the policyholder if they are still alive at the end of the term. Usually, these rates are higher than an average term policy, because of the premium return aspect.
Example 3: Some clients will use a permanent policy such as a Universal Life and fund it guaranteed to age 100. This will last the whole term and provide them with a death benefit that should last their whole life time. This is more expensive initially than the ROP and the straight 30 year term, but looks very appealing in year 31 when the policy premium is still the same.