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A Guide to Mortgage Term Insurance

Mortgage Term Insurance Is...

Mortgage Term Insurance is not a completely different type of insurance from traditional term insurance, and both forms of life insurance use the same terminology. This can be quite confusing, so below is some common terminology you may encounter while shopping for Mortgage Term Insurance.

  • Death benefit: The proceeds of the Mortgage Term Insurance that are paid out upon your death.
  • Beneficiary: The person or persons who the life insurance company is instructed to pay the proceeds from your Mortgage Term Insurance.
  • Premium: The monthly, quarterly, semi-annual or annual payment made to the life insurance company to keep your Mortgage Term Insurance active.
  • Underwriting: The life insurance company employees who review your application, medical records and exam results to determine whether or not you're an appropriate risk for Mortgage Term Insurance.
  • Policy lapse: If you forget to pay your premiums, your Mortgage Term Insurance will be cancelled. This is referred to as a lapse in coverage.

Understanding this common terminology will make it that much easier to choose and maintain your Mortgage Term Insurance.

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Policy Reserves

In order to keep enough money on hand to pay their death claims, each of the Mortgage Term Insurance companies keep a certain percentage of their incoming premiums in a reserve pool. ‘Policy Reserves', as these pools are known within the industry, are mandated by each state where the Mortgage Term Insurance company transacts business. The reserve pools are an important factor of the formula that determines how much your Mortgage Term Insurance is going to be.

These pools of funds are not just a random percentage or amount of money the Mortgage Term Insurance company feels like depositing at any given time. There is an actuarially developed formula that determines how much money a Mortgage Term Insurance company needs to deposit into their reserves for each Mortgage Term Insurance policy they issue. Actuaries develop their formula based on the percentage of insureds who are likely to pass away during the term of their policy holding period, therefore requiring a payout of the Mortgage Term Insurance to their beneficiary(ies). This percentage is derived from the past experience of similar groups.

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Mortgage Term Insurance & Cash Values

One of the factors that keeps Mortgage Term Insurance affordable is that there is no accumulation of cash values. Mortgage Term Insurance is used for a death benefit only, unless you add a rider to the policy.

Even with a rider, there is no cash value created. This means that you will not be able to take any cash value out on your Mortgage Term Insurance as you might be able to take out on a permanent insurance product.

Additionally, there is no added protection against a policy lapse with Mortgage Term Insurance, since there is no cash value to use in the event of non-payment of your premiums. With Mortgage Term Insurance, you get the straightforward, uncomplicated and inexpensive policy that will keep your family in their home and able to survive financially in the event of your death.

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Mortgage Term Insurance vs. Whole Life Insurance

Mortgage Term Insurance is a very different type of policy from a whole and universal life insurance policy. With Mortgage Term Insurance, you'll have a death benefit for only a certain period of time. You can choose increments of 5 years, and the term lengths are generally between 10 and 30 years long.

With Mortgage Term Insurance, your premiums are guaranteed to not increase for the entire length of your term. Once you stop paying your premiums (even if it's before your term is over), your family is no longer eligible to receive your Mortgage Term Insurance.

Whole and universal life insurance is paid over the course of your entire life. Both of these accrue cash value that you can take loans against, but neither should ever be used as an investment tool.

Mortgage Term Insurance also differs from whole and universal life insurance due to the fact that it's considerably less expensive to purchase. Because of the insurer not having to provide any cash value for the Mortgage Term Insurance, they're able to charge significantly lower premiums. Mortgage Term Insurance is basically pure protection that protects your home and family in the unexpected event of your death. Unlike whole and universal life insurance, Mortgage Term Insurance is never used as an investment tool.

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Decreasing Term Insurance

Depending on what type of Mortgage Term Insurance plan you choose, your policy may be designed the same way as decreasing term policy is. In a decreasing term policy, your death benefit decreases over the years while your premium remains level. Often, the decrease in death benefit can be similar to the decrease in your mortgage balance as you pay off your principal. The alternative to this would be to purchase a policy with a certain level death benefit for 5 years, than allow the policy to lapse and buy a new 5 year level Mortgage Term Insurance policy with a lower death benefit. Unfortunately, this strategy can result in higher premiums on the lower death benefit because in 5 years when you want your new policy, you will be 5 years older, which guarantees you a higher rate. Additionally, you must be underwritten again and any adverse changes in your weight or health will also result in a higher premium.

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