A borrower asked me whether or not they should get credit life insurance to pay off their you get a mortgage in case of their death. Many lenders offer this for an added amount to your monthly mortgage payment. I don’t offer insurance of any kind, but have some thoughts on this. Here are the pros and cons.

Pros:

Credit life insurance will pay off your mortgage completely. Your death does not cancel the debt. California is a community property state and if you hold title jointly with your spouse, then your spouse would still be liable for the mortgage payments upon your death. Insurance to pay the mortgage would relieve that debt. (If you are single, the insurance would pay the mortgage and would avoid the need for your heirs to sell the home to pay it.)

Credit life insurance has a feature called “guaranteed issue” which means you don’t need a medical exam to get it. This is good if you have health problems.

Cons:

Credit life insurance pays the lender directly for the mortgage. Your heirs get no funds.

For this type of policy, you pay the same amount each month, even though your mortgage balance is declining with each month’s principal payment.

Your insurance only covers your present home. If you sell it, there is no residual value or refund to you.

Alternative:

If you want insurance you would be better off with a term or whole life insurance policy. This type of policy is not on the home. It is on you and stays with you even if you leave your present home. It also provides a lump sum to your family to pay the mortgage (if needed) and additional funds settle the estate and provide funds to live on. Funds go directly to your heirs.

If you want more information on life insurance to protect your family or avoid leaving debts to your heirs, give me a call.