Why Is Mortgage Insurance So Expensive?

House expenses come long after you submit your down payment. If you are the main breadwinner for your family and you pass away while the mortgage isn't fully paid, your family could be in a scenario where they may lose their home. It is important to feel secure that your family can afford mortgage payments in the unlikely event of your death.

Simply put, mortgage insurance pays off your mortgage balance if you die — but that doesn’t mean it’s the best way to protect your most important debt. Just like any other life insurance product, mortgage insurance is useful in certain situations and not so in certain others.

So how can you decide if mortgage insurance is right for you?

Well, we’ve got you covered. We’ll tell you everything you need to know about it so that you can make an informed decision.

What is mortgage insurance?

Mortgage insurance, often referred to as mortgage life insurance, is often offered by insurance companies and mortgage lenders to homebuyers. It pays your mortgage if you die with a balance remaining. Mortgage insurance is designed to protect your family and ensures that they get to keep your house after your death.

Unlike with a traditional life insurance policy, your loved ones won’t receive a payout. The proceeds of your policy go directly to your lender.

The payout matches the amount you owe to the lender. As you pay off your home loan, the death benefit amount also reduces. The mortgage insurance premium, however, doesn’t change and is aggregated into your monthly mortgage payments. Your policy will lasts for as many years as your home loan. Mortgage insurance is nice because you don't have to worry about your family losing the house in the event of your death but, it can get expensive to pay and doesn't offer any other benefits aside from paying off the mortgage.

Why is mortgage insurance so expensive?

Mortgage insurance, as said mentioned, is often sold by mortgage lenders. Since the mortgage insurance premiums are included in your monthly mortgage cost, the whole process is smooth and efficient. Convenience of payments is one of the most important benefits of lender-offered mortgage insurance.

Lack of underwriting is another important point here. Mortgage life insurance lets you forgo a medical exam, but that doesn’t always work to your advantage.

Of course, no required medical exam means people with underlying health conditions are more likely to get approval. However, the coverage is not guaranteed. You can get turned down if the carrier thinks you’re too risky to insure.

Also, since the insurer can’t learn about your health in detail, they are taking on more risk by offering you a policy. They pass on that extra risk to you in form of higher mortgage insurance premiums. For this reason, the cost of mortgage life insurance is considerably higher than the same amount of term life insurance. You could be in incredible health but, you will still have to pay the same premiums as everyone else. If you have ever wondered why mortgage insurance is expensive, well, there’s your answer.

While your bank or mortgage will try the hard sell on you, you should think carefully before signing up for a mortgage life insurance. Ask yourself: Is the extra cost worth it? Are there any more affordable options available?

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What are alternatives to mortgage insurance?

A viable alternative to mortgage insurance is term life insurance. You can select the policy term to match the number of years left on your home loan. If you die with a balance remaining, your family can use the death benefit to repay the mortgage.

The premiums for term life insurance are lower than for a comparable mortgage life policy. That’s because it often requires a medical exam.

When you apply for a term life policy, you will have to undergo a physical examination and answer a health questionnaire. The more information the insurer has about your health, the more accurately they can assess your risk and calculate your premium rate. As a result, they can provide lower premiums.

Also, your family is free to use the payout however they like. They can use it to cover living expenses, burial costs, paying off a mortgage, education costs, and more.

Term life insurance is better than mortgage insurance in several aspects. It is usually less costly than the latter and gives you and your beneficiaries more flexibility.

Term life insurance vs. mortgage insurance for protecting your home?

For most people, the answer is yes. Unless you have a serious underlying medical condition, term life insurance is likely to be a better choice for the following reasons.

1. Save money with lower costs

Term life insurance gives you more bang for your buck, especially if you are in good health. When you apply for term life, the insurer usually asks you to appear for a medical exam. While this may sound inconvenient, it’s actually a good thing. The more a carrier knows about your health, the more accurately they can calculate the risk of insuring you. This, in turn, can translate into lower rates for many applicants. If you are in especially good shape, mortgage insurance is not the way to go.

Most mortgage insurance policies let you skip a medical exam — and hence are costlier than comparable term life insurance.

2. Receive more coverage

Mortgage insurance is tied to your home loan. The payout is equivalent to the balance on your mortgage. Your loved ones won’t get additional funds to cover living expenses, education costs, or medical bills.

There are no such restrictions with term life insurance. Generally speaking, you can take out as much coverage as you need.

3. Level death benefit

Term life insurance has a level death benefit, meaning the payout remains the same throughout. By contrast, the death benefit amount of a mortgage insurance policy decreases annually to match the reduced home loan balance left after each year. The premium, however, doesn’t change. So, as time passes, you pay the same amount of money for less coverage.

4. Freedom to use the payout as desired

With a mortgage life policy, your family gets locked into paying the proceeds to pay off the home loan. They can’t use the money for other needs, even if these needs are more pressing.

That’s not the case with term life insurance. Your loved ones can spend the money they like. They can use it to pay the mortgage if that’s most important for them. If it isn’t, they may use it for more critical needs, like paying everyday expenses.

5. Select your own beneficiary

With mortgage insurance coverage, you don’t get to decide who’ll get the funds after your death. The proceeds get paid directly to the mortgage lender. By contrast, you can name anyone as a beneficiary of your term life insurance policy.

6. Ability to extend your coverage

Most term life insurance policies include a renewability rider. It lets you renew your policy without a need to submit proof of insurability up to a certain age.

However, a mortgage policy can’t be always extended. If a carrier discovers your health condition has diminished since you first bought the policy, they can turn down your renewal request.

7. Keep your coverage when changing homes

Mortgage life insurance isn’t portable. If you refinance your mortgage, you’ll have to buy a new policy. With a term life policy, you don’t have to worry about all this.

The term life insurance policy is tied to you — not the mortgage. You can keep it if you switch lenders, sell your home, or pay off the mortgage.

When is mortgage insurance a good choice?  

While mortgage insurance can’t hold a candle to term life insurance when it comes to affordability and flexibility, sometimes it can be the better option of the two.

So, when do you need mortgage insurance?

Remember, we said that mortgage insurance doesn’t require medication, but term life insurance does. That means if you have a medical condition that could lead to a higher term life premium or to having your life insurance application denied, mortgage insurance could make sense for you. It also makes it easier to qualify for if you have been rejected from other types of life insurance in the past.

However, keep in mind this important piece of mortgage insurance advice: Answer all the questions that your mortgage insurance provider asks truthfully. If the insurer finds out that you lied or withheld information, they can refuse to pay the death benefit.

Conclusion

Mortgage life insurance protects your loved ones from burdensome home loan payments if you die before you expect to and allows them to easily payoff the mortgage balance. Its main benefit is that it doesn’t require a medical exam.

This is a good option for those who have a serious illness. If you are in good health, however, you may be better off buying term life insurance instead since it’s cheaper and more flexible.