The world of insurance is a complicated one. It sometimes seems impossible to know when a policy is a wise investment or a total rip-off. When it comes to insuring a mortgage with a mortgage payoff policy it gets very complicated because there are so many different policies around.
Is it better to buy an insurance policy from a lender or from an insurance company? Should you have an accidental death policy? Or would a decreasing term insurance be best? This article will examine the two most popular types of mortgage payoff policies and shine some light on the subject of taking out an insurance policy that will pay off your mortgage in the case of a tragic event.
Accidental death policies
If you are paying a mortgage, it gives you a lot of peace of mind to know your mortgage will be paid off if you should pass away. Because of this, many mortgage lenders offer their own insurance policies. You should look closely at their policies, however because many times they are accidental death policies. This means, if you should let your cholesterol get high (even if this is done totally by accident) and because of this you have a heart attack and die, the insurance policy will not pay off the mortgage.
For your family to collect on an accidental death policy you would have to die via some unexpected event. Such an event could be as in the case of Mr. Gianelli who was one of Dr. Robert Hartly’s patients on the old “Bob Newhart Show.”
Mr. Gianelli was unloading a truck full of zucchinis, after he pulled the first zucchini off of the truck; an avalanche of zucchinis fell from the truck and thus, killed poor Mr. Gianelli! He was “zucchinied to death” and if he had accidental death coverage his family probably would have collected.
Watch for the fine print
There isn’t too many other ways to collect on an accidental death policy. If your plane comes down, but flying is part of your job, this type of policy will not pay. If you drive your car as part of your job, a death by car accident may be considered an occupational hazard and would not be covered.
In short, accidental insurance is like playing the lottery and you may want a more stable type of policy to protect your family than they can provide you. That brings us to the ever popular, “decreasing term insurance.” This type of policy is built on solid ground, but it does have a couple of anomalies you should look for.
With a decreasing term policy, the face value of the policy decreases over time. This makes sense because your mortgage principal will decrease over time. So, an insurance company can sell these policies inexpensively because it is more likely they will be paying off late in the term, when the face value is little, than earlier in the term when the face value is high.
This usually makes a decreasing term policy a good buy, but here’s what to look for. Trace the face values of the policy throughout its history, usually 30 years. Then compare these figures with an amortization schedule of your mortgage. In many cases you will find periods within this insured term where you will be under insured.
Decreasing term vs. amortization
For instance, many times a $300,000 decreasing term policy will have a face value which will become lower by $10,000 a year. So, after 5 years the face value of the policy will be $250,000. However, on a $300,000 mortgage at 7% for 30 years, after 5 years $282,394.77 will still be owed.
Also remember, if all goes well and you live to pay off your mortgage in full, you will be left with no life insurance. So, the moral of the story is, make sure you have ample insurance, period. You should have enough to pay for all your post death expenses, not just your mortgage.
This is one of the cruel realities of life. Life insurance gets more expensive as we get older so the sooner we deal with the matter, the better. Yes, a decreasing term policy might be the answer. Certainly, it is far superior to accidental insurance, but make sure you use it as a supplement to another more well-rounded policy.