Marissa and Marcello, both 25 and just married, bought a condo together. Now they need a 20-year mortgage for $100,000. Marcello is still in school, so they depend on Marissa’s income to pay the bills right now. Although she is in excellent health, they decide to insure the loan in case something happens to her. How much will it cost?
Marissa and Marcello look into two options:
- Mortgage life insurance on the loan from the bank that holds their mortgage.
- A 25-year term life insurance policy for Marissa.
Here’s what they find:
| If they get | The death benefit today is | Death benefit when they pay off the mortgage will be | Monthly premiums | Total they spend over 20 years |
| Mortgage life insurance | $100,000 | $0 | $9 | $2,160 – $2,380 |
| 25-year term life insurance for Marissa (non-smoker) | $100,000 | $100,000 | $8 | $1,880 – $2,070 |
Marissa and Marcello decide: They take the term life insurance for Marissa for a number of reasons:
• The term life premiums are lower because of Marissa’s age and the fact that she is a non-smoker. The mortgage life insurance, on the other hand, costs the same for everyone.
• The mortgage life insurance will end in 20 years, when they pay off the loan. With the term life insurance, they get an extra five years of coverage.
• They can always convert to permanent insurance if their policy allows this.
Lesson learned: This does not mean that everyone would be better off buying term life insurance to cover their loans. It depends on many factors, such as age, state of health, personal situation, and the length of time the insurance is needed.
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