Mortgage life insurance isn't always the best choice

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times,
published August 19, 2001

Q. Shortly after I signed the mortgage papers on my new home, the unsolicited mail began arriving from insurance companies offering to sell me mortgage insurance. "You die, we pay," they say. I have heard from about 25 companies, several of which sent follow-up letters. Providing mortgage insurance must be a very good business for the insurance companies. Does it make sense for anyone to buy this?

A. What makes sense is to think about this question: How would my dependents pay their expenses if I were no longer around? If the answer is "not very well" or something similar, then buying some form of life insurance should be a priority.

Solicitations such as the ones you are getting at least start people thinking about this question. But for most of us, mortgage life insurance is not the best way to provide for the people we care about.

The first option most people should consider is a term life insurance policy that will pay its benefits to a chosen beneficiary rather than to a mortgage lender. These policies generally are less expensive than mortgage life insurance, especially if you are in good health or have access to group benefits through an organization. They also give your beneficiary the flexibility to spend the money on the highest priority needs, which might not include paying off the mortgage.

But mortgage life insurance sometimes is a good choice. It can be a lifesaver if you are in poor health and cannot qualify for other insurance. And it is convenient, which means you can get insurance even if you are not willing to take the time to look for a better deal.

Q. My daughter took out a 30-year mortgage at 8.125 percent interest on her home purchase eight months ago. With the recent drop in mortgage rates, she is considering refinancing at 7.125 percent (or less, if she can find it) for 15 years. She intends to stay in her home for many years. Does this move make sense? If so, should she roll any closing costs into the new mortgage?

A. It probably does make sense for your daughter to refinance under the circumstances you describe. If she can afford to pay the closing costs out of pocket, that would be the best choice. If she cannot afford to do that, adding the closing costs to her new loan is a reasonable alternative.

In researching mortgage options, collect rates and closing costs for mortgages of varying terms. To determine your savings, use a mortgage with a term similar to the remaining term on your existing mortgage. Compare the two monthly payments (principal and interest only) and calculate how many months it would take you to recover your closing costs through the lower payments.

If your daughter thinks she can handle a higher payment, a 15-year mortgage will allow her to pay off her debt more quickly. If she is uncertain about paying the higher amount, she might consider a 20-year mortgage as a compromise. If she opts for a 20-year or 30-year mortgage, she can always make extra principal payments to reduce her balance more quickly.

Q. My wife and I received $600 from the IRS. Is this going to be reported as taxable income for 2001?

A. No. That was not income. The government gave you back some of your own money.

Q. The tax reduction for the 28 percent bracket to 27 percent is effective July 1. Do I have to calculate my income to July 1 and figure the tax at 28 percent and the last half of the year at 27 percent?

A. No. A rate of 27.5 percent will apply to your income for the whole year.

Online money map

The U.S. Department of Labor and the Certified Financial Planner Board of Standards have put together a booklet outlining the basics of saving, investing and planning. Savings Fitness: A Guide to Your Money and Your Financial Future is available on the Web (http://www.dol.gov/dol/pwba/) or by calling (800) 998-7542.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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