If you know anything about mortgage life insurance, you’ve heard the complaint that the benefit decreases, so it’s not worth it. But is that really true?
What is Mortgage Life Insurance?
Mortgage life insurance is life insurance designed to protect your ability to pay off your mortgage in the event of premature death. 20/20 Mortgage Life Insurance allows you to select your beneficiary and qualify easily without need of a medical exam. Unlike bank-issued mortgage life insurance, your policy is yours so it goes with you between lenders instead of requiring you to requalify, and because 20/20 has limited overhead, the premiums are lower, saving you thousands of dollars.
What is a declining benefit?
Just what it sounds like, a declining benefit means that as your mortgage decreases, the amount you would be paid out if you made a claim also decreases. There are several reasons for this: mortgage life insurance is designed to protect your biggest liability, your mortgage. As you pay off your mortgage, you have less need of that coverage, in theory. Additionally, your insurance is probably to protect your children from a major liability, but as they grow older and become independent themselves, this becomes less of an issue as well. Declining benefit exists in regular life insurance as well, typically term, not just mortgage life insurance. The theory goes that you’ll be making payments on your debts so you’ll have less need of a larger payout, and that your future income earnings will decrease, which insurance is technically designed to cover against. That is, as you near retirement age, your future earnings potential decreases, and thus so does your benefit.
Is a declining benefit worthwhile?
Because your premiums don’t go down with a declining benefit, it can seem unfair to pay the same premium for a policy that started at $350,000 and is now worth $35,000. But the risk to the insurer goes up--you wouldn’t expect lower premiums as you age, generally speaking, and this is true even if the policy value decreases. In fact, having a declining benefit is part of what allows the premium to stay steady at a lower cost than what you would pay for a whole life insurance policy (or permanent life insurance). In addition, because 20/20 Mortgage Life Insurance has a streamlined, online process and no bank branches to help fund, the overhead is reducing resulting in a lower premium overall.
What about whole life insurance?
Fun fact: technically, whole life insurance also has a declining benefit. You just can’t tell because of the way it’s marketed and paid out. Life insurance is calculated using a ton of mathematics. Actuaries determine exactly when they expect you to need the life insurance (and thus for the company to have to pay out) and how much the risks vary depending on your lifestyle, health, age, and other factors. Premiums for whole life insurance are typically much higher in order to keep the coverage benefit stable.
Consider this: if your coverage stays the same, but the risk to the insurer goes up, they in theory would need to charge you more money to balance out the increased risk. But they don’t. How does that happen? They create an amortization schedule that aligns the increased risk with a decreasing benefit. This allows them to calculate exactly how much needs to be added to the fund every year to maintain your coverage (hello, premiums) and they invest the fund to create a small interest rate that covers the remainder. So while it looks like your coverage stays the same, in fact you’re essentially creating a savings account for yourself with some help. Not a bad thing, of course, but it puts mortgage life insurance’s “declining benefit” into perspective. They work very similarly, mortgage life insurance just doesn’t top up against the amortization schedule.
Remember that an insurance company is essentially a big slush fund that everyone pays into. This allows the company to have enough money to pay out on the policies that don’t fit the actuaries’ calculations: the premature death accidents that insurance is designed to protect against. But if someone dies young, they won’t have paid in enough premiums to off-set their declining benefit, as noted above. This is where everyone else’s premiums come in. They ensure the company as a whole has enough assets to cover their policies. They are “betting” on most people not needing to make a claim. Only because of the advanced mathematics, it’s not a huge gamble; although there is, of course, risk.
This explanation of how insurance companies work is, of course, vastly oversimplified, but we’re hoping it might put declining benefit into perspective and settle some of the complaints around it.
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If you’re interested in protecting your biggest liability, your mortgage, consider 20/20 Mortgage Life Insurance. We offer portability, easy qualification, the ability to name your beneficiary, and low premiums. Learn more about why we think 20/20 Mortgage Life Insurance is better. If you’re interested in a quote, try our online quote calculator, or contact us to discuss your options.
