Why I'd Never Buy Mortgage Life Insurance -- and You Probably Shouldn't Either

There are better ways to protect against the loss of your home if something happens to you.

When you take out a home loan, you may be offered mortgage life insurance. Also called mortgage protection insurance, it helps ensure you don't lose your home if you become disabled. It can also make sure your loved ones don't lose the house if you die -- the policy will pay off your home loan in the event of your death. If you also have disability coverage, the policy will make payments when you have a qualifying condition.

Mortgage life insurance is different from private mortgage insurance (PMI), which lenders may require you to buy if you make a small down payment when buying your house. Unlike PMI, mortgage life insurance is usually optional. And although mortgage life insurance may sound like a good product, I'd never buy it. Here's why.

It loses value right away

With mortgage protection insurance, you're essentially buying a life insurance policy that loses some of its value every year. That's because your mortgage balance gets paid down over time.

Say you take out a $250,000 mortgage and you also buy mortgage protection insurance. You start out essentially paying for $250,000 in insurance protection. That's what it would cost for the insurance company to pay off your loan balance if you died soon after borrowing.

But you'll be steadily paying down your mortgage every year. Eventually, you'll owe only $200,000, then $150,000, then $100,000, and so on. The value of your protection starts eroding when you make your first payment, but premiums for the insurance typically stay the same for the life of the loan. This isn't a very good value for you.

Premiums are expensive

Speaking of those premiums, that's another reason why I wouldn't buy mortgage life insurance. For the amount of protection you're buying, premiums are pretty expensive. It would almost always be cheaper to buy a term life insurance policy to protect against the loss of your home. (Term life insurance has a set time period, such as 20 or 30 years.) And if you're worried about being unable to make mortgage payments due to an illness, you could also get a disability policy.

Say you find a $250,000 term life insurance policy that will always pay out a $250,000 death benefit for the life of the coverage (rather than the value of the policy shrinking over time). You'd be far better off doing that than buying costlier coverage that's continually losing value.

Less flexibility than other insurance options

Finally, term life policies provide way more flexibility. When a term life insurance policy pays out, your family can use it to pay off your home loan or they could use it for other things. With mortgage life insurance, though, the only thing the policy will do is pay off the home -- it won't offer money your loved ones can use for anything else.

The big downsides of mortgage life insurance compared with term life insurance make it a no-brainer for most people. As long as you can qualify for term life coverage, opt for that instead and just say no to mortgage life insurance.