On our discussion boards the other day, NewFool444 asked this question:
"I have been thinking about insuring my ability to pay my mortgage should something happen to me. I am male and single, no children. I have separate disability insurance from my employer. The policy I'm considering is about $150.00 per month. If I pay the premium for 20 years, I will get the whole amount back at roughly 8% interest. It sounds like a sort of good plan to force me to save and to protect me should something happen to me. My sister and her kids could pay off the house and have something of value. Any one ever buy this stuff? Is it a no-no?"
There's no definite answer that I can provide here. Everyone is in a different situation, and our situations change from year to year, too. He may have a wife and kids within a few years, for example. Still, here are some considerations for him -- and anyone else who has been pondering the same question:
- If the policy you're looking at is designed to pay off your mortgage if you die, consider that the loved ones you leave behind may not have wanted that money spent that way. Such a policy isn't too flexible. If you instead simply boost the amount of your life insurance, the payoff can ultimately be used to pay off a mortgage or for any other needs.
- Earning a fairly reliable 8% return does indeed look pretty good. It's less than the stock market's historical annual average return of roughly 10%, but then that's less of a sure thing. Over any 20-year period, the stock market might average a 10% return, a 6% return, a 12% return, or some other amount of return.
I found some additional information on this topic online from "The Mortgage Professor," Jack Guttentag (who actually was once my mortgage professor in business school). He recommended looking into term life insurance, saying, "... the coverage of a term policy remains constant during the term, whereas the coverage of a mortgage insurance policy declines as the loan balance is paid down and disappears completely if you refinance. In addition, the market for term policies is extremely competitive, and you can shop among carriers. When you buy a mortgage life policy through your lender, in contrast, you have no opportunity to shop. The upshot is that the mortgage insurance policy will probably cost more than the term policy. You will be paying more for less coverage."
Learn more about insurance in our Insurance Center. You may not have thought about some kinds of insurance, such as disability or long-term care insurance, but they're vital for many people. Take a little time to learn more and you may be very happy you did if some calamity occurs in the future.
Here are some additional articles on this important and not-so-boring topic:
- 60-Second Guide to Insurance
- Avoid Insurance Sticker Shock
- Health Insurance for Your Pet
- How to Insure a Bundle
- Prepare to Be Disabled
- Credit Dings = Insurance Woes
Our Home Center may also be of interest. Learn more about buying, selling, and maintaining a home in these articles:
- Buying a House Is Easy!
- The Right Real Estate Agent
- Make Money as a Landlord
- 9 Facts About Mortgages
- 10 Home Enhancement Tips
Finally, if you're in the market for life insurance, check out companies such as MetLife (NYSE:MET), Prudential (NYSE:PRU), AXA (NYSE:AXA), ManuLife (NYSE:MFC), ING Group (NYSE:ING), and privately owned New York Life-- along with their websites -- for more information.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
