Mortgage lenders typically require borrowers to insure their mortgage. This ensures that the lender does not risk loss on repossession or reselling of the property in the event of the mortgagee's death. Mortgage life insurance is a normally a specialist type of life policy. However, several types of life plans could adequately cover a mortgage.
Since a mortgage exists for a defined period and usually has a substantial initial balance, term plans are most suitable for mortgage protection. However, not all term policies are ideal for mortgage coverage. Three basic types of life plans are suitable for that purpose.
1) Mortgage redemption insurance
This is a decreasing term plan that matches the reducing balance of your mortgage. With mortgage redemption insurance, premiums are level across the coverage period. A level premium exists because insurance actuaries determine the total cost of coverage over the period and apply the average premium. The death benefit for this plan matches the remaining balance of the mortgage.
2) Non-convertible or convertible term life insurance
Convertible and non-convertible plans also provide a low premium and a level death benefit. Non-convertible plans are cheaper and are preferable for mortgage protection. However, convertible plans offer the option of transforming your life policy to permanent life insurance when the term plan matures.
3) Renewable term life
With renewable life insurance, the mortgagee can renew the term insurance coverage at the end of the term without providing further evidence of insurability. This plan provides an additional option for the mortgagee - not only in terms of other life insurance needs. In addition, a mortgagee can extend the term if it becomes necessary because of a rescheduled mortgage.
When addressing your mortgage protection needs, it is important to avoid certain types of life insurance. In addition, take care not to amalgamate all of your life coverage needs (including mortgage protection) into one unsuitable plan. The types of life plans to avoid for mortgage protection are permanent coverage, increasing term life and refundable term insurance.
Permanent life insurance is the most unsuitable for mortgage life protection. It is expensive and lasts longer than the mortgage period. Increasing term life has a death benefit that increases as the mortgage balance decreases, which is counter-intuitive. Refundable term insurance is generally an awful type or insurance that you should avoid. Some lending institutions offer mortgage protection plans that do not often compare favourably to term coverage offered by life insurers.
Your mortgage balance represents a good debt that is necessary to protect for the benefit of your lender. However, choosing an unsuitable life plan can add unnecessary expenses to your mortgage repayment. To avoid this, stick to mortgage redemption insurance, convertible/ non-convertible term life plans and renewable life insurance.
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