Choose An Insurance Product That Suits Your Needs And Budget

Ginny…My neighbor told me about a clause to be added at the time of signing to buy a house. It would pay off the remaining mortgage in case of a spouse’s death. We are buying a house through a Veterans Affairs (VA) loan for $350,000, and we are both in our 70s.

Is this wise? Is it expensive? How would we do this? Is it better to just have a life insurance policy to cover the mortgage instead of this clause?  Karla M., Bloomfield Hills, MI

Karla…What you are referring to is a form of insurance that pays off your loan in case of your death. Some people refer to it as a “life insurance” policy, but we’ve also heard it referred to as “mortgage insurance” or “credit insurance.” When we’ve looked at this issue in the past, we have found that this type of insurance generally is quite a bit more expensive than term life insurance.

You and your spouse are at an age where life insurance gets expensive on a year-to-year basis. Why would you need this extra insurance policy? The obvious answer is that the surviving spouse would not be able to afford the mortgage on a reduced fixed income. If either surviving spouse would have enough income to live comfortably in retirement, then buying another insurance policy isn’t worthwhile.

If you decide that you must have life insurance, then you should determine what type of product is right for you and how much you are willing to pay.

When you price different types of life insurance and mortgage or credit insurance, you can decide which policy suits you best.  Find out what conditions must be fulfilled for the insurance company to pay out in case of a loss. If you are looking for coverage to help your spouse after your death, a policy that requires the death of both spouses before it pays out will be of no help.

If the yearly premium is too high, you might decide not to move forward with it. Some companies require details about your height, weight, age and other personal information. Others may not insure you at all if you are older than 60 (when it comes to mortgage or credit insurance policies). Other companies might limit the term of any insurance policy: You might be able to buy a term policy, but they won’t guarantee that they would renew the term, and the length of the policy might not be longer than 10 years, given your age.

A quick look at a national insurance company’s rates showed that the annual premium for a $250,000 policy would be about $3,000 for each of you. And we couldn’t find a company willing to issue a mortgage protection insurance policy for someone your age. We aren’t saying they are not available, because some products become available directly to borrowers through lenders and mortgage brokers. But they’re not widely available or competitively priced.

One final note: If you have a term life insurance policy, the beneficiaries can use that money as they please. If they keep the home, they can keep it with the mortgage. In most cases, mortgage protection insurance might name the lender as the beneficiary on the policy. If there is a death, the lender gets the money directly. Any cash benefit to your family would come only if you refinance the home or sell the home.