Whole vs. Term versus Mortgage Life Insurance: What You Need to Know

When you realize you need life insurance, it can be difficult to decide what type of insurance to buy. Agents will often steer you to whole life, while finance gurus will push you towards term. And what about mortgage life insurance? The following should sort all that out for you.

Term Life Insurance

Generally, term is your best bet for affordable life insurance. It insures your life for a specified time period, or term, typically 20 or 30 years. If you pay your premiums on time and die before the term expires, your life insurance will pay the beneficiary or beneficiaries of your choice.

With this type of life insurance, if you live beyond the policy’s term, your beneficiary won’t receive a payout when you die. However, before the term expires you are usually given two options. First, you can let your policy lapse and no benefits will be paid upon your death. Second, you could convert your term life to a whole life policy.

Whole Life Insurance

Whole life insurance is a little more complicated. The premiums are more expensive than those of term life. This is because the policy does not expire if you keep making your payments on time. You can also build up a cash value in your policy, which you can borrow against or cash out, similar to a retirement account.

This part can be confusing because the cash value of a whole life policy builds up over time. And it is only after 10 years or so that the policy’s cash value can be greater than what you have paid into it. And if you die after ten years, your beneficiary receives only the face amount of the policy, rather than the face amount plus the cash value.

Mortgage Life Insurance

This is really a specialty line of life insurance, intended to cover only your mortgage. It has become popular through marketing done by mortgage companies and lending institutions. Ultimately, it’s a term life insurance policy with benefits that decrease as the mortgage debt decreases. Even though benefits go down, premiums are the same every year. Most people will prefer term life insurance because of a lower rate without decreasing benefits, but mortgage life insurance usually requires no physical exam, making it a good option for those who may not qualify for traditional term life because of health problems.

Whichever policy you choose, be carefully to carry enough coverage to sustain your loved ones until they will become financially secure on their own. For the kids that can mean meeting their needs until they turn 18, or meeting their needs until they finish college. Your spouse will probably no longer need the financial help upon reaching retirement age, but may even be fine as soon as the kids are grown and out of the house, leaving fewer living expenses. Even buying just enough to pay off the mortgage could be what you need. Your personal situation and the earning capacity of your loved ones must be considered.