No PMI? Get Term Life for Greater Protection

August 19, 2010

Even in today’s mortgage market, homebuyers call insurance companies asking about “mortgage insurance.” While there once were mortgage insurance products that had a decreasing benefit matching the decreasing loan obligation over the term of the mortgage (generally 30 years), these types of policies have become essentially obsolete.

Modern homebuyers told to get mortgage insurance are actually really looking for PMI – private mortgage insurance – which is insurance required by lenders whenever the down payment on a home is less than 20%. This insurance doesn’t give any benefit to the borrower, but protects the lender if the borrower defaults, by paying off the loan. In most cases, once the balance of the mortgage drops below 80% of the appraised value of the home, borrowers have a legal right to drop the PMI, but there are special procedures that must be followed in order to do that.

What can consumers who don’t have PMI do to protect their families from the burden of a mortgage if they die? One option is to purchase a mortgage protection policy. Basically, this is a form of term life insurance that pays off a mortgage after death so that the beneficiaries aren’t saddled with the bill. Many savvy consumers purchase such policies not just to cover their mortgages, but also to pay off other debts, and provide living expenses for their survivors, and sometimes even college tuition for children.

The bottom line? As term life insurance becomes less and less expensive, it’s wise to have life insurance with a large enough death benefit to take care of those you leave behind.