Why Mortgage Life Insurance Isn’t Ideal for Most People

When deciding whether to purchase life insurance, most consumers focus on whole life insurance vs. term life insurance. Whole life insurance is a policy that lasts as long as a policyholder is alive. Term life insurance lasts for a prearranged period of time, such as 10 or 20 years, and is often used to insure against a parent’s untimely death during specific stages of a family’s life.

There is another subset of life insurance, however, that covers specific areas of need. One prominent type is mortgage life insurance, which would pay off a mortgage upon the policyholder’s death.

This is touted as a way to cover a specific, big-ticket item for a lesser cost than traditional, more comprehensive plans. However, critics note that mortgage life insurance policies are not a great deal for consumers because, unlike traditional plans, they decrease in value the longer they’re held — because they only cover the outstanding mortgage debt at a given time.

We asked Paxton Kelso, a financial advisor and a member of NerdWallet’s Ask an Advisor network, about whether mortgage life insurance is a good idea for consumers.

Are specific types of life insurance a good idea?

I’m not a fan of restrictions placed on how my loved ones could spend a life insurance benefit. If these kinds of features are added as part of my employer’s life insurance package and they are free or super-cheap, great. But I would rather own pure life insurance that my family could use as they saw fit instead of being hemmed in by having to use the benefit for a specific purpose.

Paying off a mortgage is a good thing to do, but I’d rather have a policy that allows my loved ones to have multiple decision options. For example, I or my spouse may not wish to pay off the house depending on the family’s situation or if the real estate market is not favorable to completing the mortgage. We might wish to use the death benefit for other things.

Perhaps there is a time when mortgage insurance makes sense — I just have not yet seen it. It could depend on cost and on other goals and objectives for the client.

What should consumers keep in mind when deciding on insurance?

Start with goals and objectives. To use myself as an example: If something happens to me, I want college funded for my kids. I want them to know that their dad wanted them to focus on studies and career opportunities. I also want my wife to have total flexibility. I want her to have the option to pay off the house if it makes sense to do so. But if she decides it would be best to not work for 15 to 20 years (our kids are 7 and 4), she needs a buffer toward retirement. This kind of approach would not be possible with a life insurance policy that restricts options.

Any additional tips for getting the right policy?

Your financial advisor or agent should be able and willing to discuss pros and cons of all scenarios. Ask specific questions to confirm that you are getting transparency from them regarding your situation.

Paxton Kelso is a wealth management advisor and director of insurance operations at Talis Advisors in Plano, Texas.