Should You Insure That Mortgage?

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You've got a darling family, and now you even have a brand new home! With a brand new mortgage to boot, of course. Many people at this stage in their life have some occasional dark thoughts, like a flashing image of themselves getting run over by a bus, and they suddenly wonder how their family will pay off the mortgage on their own. It's a valid worry.

But a perhaps seemingly obvious solution isn't the best one. I'm talking about a special form of insurance that will pay off your mortgage should you expire or become disabled -- it's sometimes referred to as "mortgage life insurance" or "mortgage disability insurance." (And note: I'm not talking here about PMI, or private mortgage insurance, which is required if you put down less than 20% on the home you buy.)

So why is this insurance not the best option? Well, to begin with, it's rather limited in its scope. For many people, term life insurance and/or disability insurance makes more sense. If you have a term life policy and you croak, your beneficiaries will get a bundle of money and can spend it in whatever way is best for them -- which may not be paying off the mortgage. With mortgage life insurance, the payoff usually goes directly to the lending bank, not to your beneficiaries.

Many of us already carry disability insurance through our employers, so that can help with mortgage payments, if necessary. (It might be smart to purchase additional disability insurance, though -- learn more.)

Here's an interesting detail about these insurance policies: Mortgage protection insurance is generally a group policy, where the insurer is lumping together many people and spreading the risk around. Term life insurance, meanwhile, usually requires a medical exam. If you're bathed in the pink glow of health, a term policy may be considerably cheaper than mortgage protection insurance. If you're a physical wreck, you may get a better deal (though a more limited one) through mortgage protection insurance, since it requires no exam.

Some people think this mortgage insurance is required -- often because their lender is urging them to buy some -- but it's actually optional.

In a SmartMoney article, Robert Hunter, director of insurance for the Consumer Federation of America, explained that, "The cheapest and most efficient way to buy life insurance is all in one place." The article also offered this example: "Right now, a 40-year-old male nonsmoker could buy a 30-year term life policy with a $250,000 payout for about $420 a year, according to Term4Sale, a Web site that lets users compare term life insurance quotes. The same person would spend about $600 a year if he or she bought a $250,000 mortgage insurance policy from Countrywide instead. (Again, that's a great deal for 40-year-old smoker, who'd have to shell out roughly $1,480 a year for a 30-year term life policy.)"

An InsWeb.com article added that, ". as opposed to mortgage life insurance, term life insurance pays a death benefit even if the mortgage is already paid off." And: "Finally, term life insurance is simply a better return on your investment. The National Association of Insurance Commissioners (NAIC) says that mortgage insurance lenders pay out only about 40 cents in benefits for every dollar consumers spend buying that type of policy, compared with 90 cents on the dollar paid out to consumers who hold regular term life policies."

Learn more about the not-so-exciting-but-still-critical topic of insurance in our Insurance Center. The following articles may also be of interest:

• When Your House Burns Down
• 60-Second Guide to Insurance
• Avoid Insurance Sticker Shock
• How to Insure a Bundle
• Disaster-Proof Your Prized Possessions

If you're interested in home-buying and home-owning issues, visit our Home Center, which features lots of money-saving tips and even some special mortgage rates.

And if you're in the market for mortgage insurance, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some major lenders:

• Wells Fargo (NYSE: WFC)
• Capital One (NYSE: COF)
• Washington Mutual (NYSE: WM)
• Wachovia (NYSE: WB)
• Countrywide Financial (NYSE: CFC)
• National City (NYSE: NCC)

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.