Ed Hinerman On Life Insurance

Mortgage Life Insurance! How To Beat The Bank!

September 6th, 2007

Where isn’t if offered? Whether you are buying a new entertainment center, a car or a house, if financing is involved the question will always pop up. “Would you like to add credit life insurance (mortgage life insurance)?”

Mortgage life insurance is a nifty product with a ridiculous history. The idea is that you have enough life insurance to pay off the mortgage or loan, and as the amount that is owed decreases, the amount of insurance also decreases. If the mortgage is the only reason for the insurance, this theoretically keeps you from being overinsured.

There are several inherent problems with mortgage life though. First, the decrease in insurance doesn’t really mirror the decrease in the amount of the loan. Over the life of the policy the amount of insurance only decreases to 50% of the original amount. So, if you have a loan for $250,000 for 30 years, at the end of 30 years you owe nothing. If you take out mortgage insurance (with the bank as beneficiary) for $250,000, at the end of 30 years there is still $125,000 in force.

The product is also substantially over priced in comparison to a level term insurance product. That has had me scratching my head for the last 29 years. If you have a policy for $250,000 that is guaranteed to have a level premium and level death benefit for 30 years, logic would dictate that it should cost more than a mortgage policy where with each passing year, the death benefit decreases. That is not the case. The decreasing policy has a level premium for 30 years that is higher than the level premium on the policy that has a level death benefit. Stranger than fiction!
This may be one of those leaps of assumption I am prone to, but do you think mortgage life and credit life are sold because they are unbelievably profitable?

You can accomplish the same thing by buying the less expensive level term policy. Instead of the bank, your wife or family would be the beneficiary. Then you can add what is called a collateral assignment. This little jewel makes the loan the first thing that gets paid upon your death. It pays exactly the amount of the outstanding loan to the bank and the balance goes to your spouse. It tracks the loan to the penny, so there is never a point where the bank can make more than what is actually owed to them. And, there isn’t any cost to add a collateral assignment.

Bottom line. Mortgage life and credit life are profit centers for lenders. That salesman that talks you into that overpriced, inappropriate policy is doing so because he makes a great bonus, not because it is the right thing for you to do.

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• How Can We Overcharge You? Let Me Count The Ways!
• Why term life insurance? What to think about!
• Term Life Insurance Policies 101, Part 2!
• Does Cash Value Life Insurance Really Make Sense?
• Should I buy whole life instead of term insurance??

Entry Filed under: insurance, life insurance