Why We Avoided Mortgage Life Insurance on our $520k Mortgage

When we signed up to take on a $520,000 mortgage as two 24 year olds, we had wondered whether we should purchase mortgage life insurance which would help us pay off the mortgage balance should either of us have to leave this world. The mortgage rep really wanted us to get it.

It seemed like a sweet deal at first. It would cost another $90 per month on top of the $2,000/month mortgage payment and if something happened to one of us, it would pay the mortgage balance off in full. It seemed like the right thing to do because neither of us wanted to leave each other hanging if one of us had to suddenly leave this world. The mortgage rep at the bank was insistent on signing us up.

We went home after meeting our mortgage rep, and did some research and come to learn that it’s one of the stupidest products on earth.

1. A claim could be denied after making years of monthly payments

Something that we weren’t told when the mortgage rep tried to provide “advice” on mortgage life insurance was that underwriting was done after a claim is made not prior to making the monthly $90 premiums. 

In other words, the mortgage insurance company was going to determine whether we were eligible only after one of us passes away and we had to make a claim.  At that time, they could potentially determine we weren’t eligible for the insurance because we had “pre-existing health conditions” or we failed to disclose all the relevant information necessary on the application and refund us back all the monthly premiums we made to date.  Since there isn’t a health assessment prior to signing up for the mortgage life insurance (the responsibility rests on us to complete the millions of medical questions correctly in the application).

2. Our mortgage balance decreases over time but we continue to pay the same $90 monthly premiums

Even if we assumed that we would be eligible for the mortgage insurance and our claim would go through, paying $90 a month knowing our mortgage balance $520,000 mortgage would decrease over time seemed kind of silly as our level of protection decreases over time but we would be required to pay the same premiums. For example, if we were aggressively paying down our mortgage and the balance dropped to $100,000, the coverage would be for only $100,000 meanwhile the premiums stayed the same at $90. 

A better alternative we found was to get a 30 year term life insurance for $520,000 for the each of us and it would only cost $70 per month in total. Getting term life insurance and going with a reputable insurance company would mean we would do all our health examinations ahead of time to ensure we qualified for it before we even started paying any premiums.

The most relieving part of doing this is that we would know the payout would be a minimum of $520,000 irregardless the size of our mortgage and should we both pass away at the same time the payout would be $1,040,000 (twice this amount).

The more and more we thought about this, the more stupid we thought mortgage life insurance was and how absolutely restrictive and complicated it was – something the mortgage rep never bothered to mention.

Mortgage life insurance pays the bank back the mortgage we owed them and assuming we both past away at the same time, why would we care about them? Seems like a total waste of money and super expensive as we get less coverage over time as the mortgage balance decreases. No wonder the mortgage rep was pushing this to us to get – the banks would benefit the most from this not the insured individuals.

Term life insurance would pay our beneficiaries not the bank as we would have total freedom to pick who the payout would go out to. This made much more sense to us.

We were so glad we didn’t fall trap to this. Do you have mortgage life insurance?

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