Is life insurance linked to mortgage always a good idea?

Question

My husband and I are 30 years old, have stable jobs, and earn roughly the same salary. We are buying our first house, with a 35% down payment. The monthly mortgage works out to ~15% of our combined in-hand monthly incomes (after paying taxes and pension funds). Based on our current rate of savings, we expect to pay it off in 12-15 years. We do not have kids yet, but plan to, in the near future.

We also have some disability coverage, good health insurance, and no other debt. We plan to get fire insurance on the house itself (not contents).

My question is, do we need additional disability and life insurance linked to our mortgage? What about insurance on damage to the contents of the house against theft/accidents? Is there any statistical data that can help us decide? Our current assumption is that each of our salaries is independently enough to make the monthly mortgage payments, and also replace most of the house contents, so we do not need additional insurance. Or, are the premiums worth it?

Answer 1

Welcome to Money.SE. Please take a look at the recent question, Why buy insurance?. Much of the discussion of risk applies to this question as well.

The numbers look like your mortgage is closer to 10% of gross income. Life insurance in your case is a personal decision. In my opinion, life insurance should be to help loved ones left behind not experience financial trauma. The single wager earner dies, and leaves a non-working spouse with 2 toddlers and a mortgage? Trauma. Your situation? Not so much.

You should start to plan your mortgage needs based on the kids you expect to have. When running the numbers after we got married, we had a house that we each couldn't afford alone, and were planning a child that would go to college. If I were you, I'd look at the worst case numbers, and price out term that will cover your planned children, but perhaps not buy the policies until the first one is born.

House contents is purely up to you. You should ask your insurer what contents insurance for fire/theft will cost. Some people are minimalists, and can replace their entire furniture collection with a single paycheck. Others love there $10K leather sofa. If, as you suggest, you can self-insure contents, and would lose too much sleep repurchasing the contents after the house is re-built, that's fine.

To answer the original question - Term insurance. I'd never buy a policy tied to a loan balance. To clarify - as time passes, the mortgage payment is less painful, its real value dropping with inflation and your salary increases. But the very fact that you are earning more, and more valuable to your spouse and children points toward needing more insurance, not less. An the house, while it's great to kill that mortgage, has higher property taxes, along with higher maintenance costs as things need a round of repair or renovation. The need for insurance is more of a step function, and the use of multiple term policies can be timed to give you the right coverage depending on the stage of your life.

Answer 2

I will give a slightly different twist to JoeTaxpayer's answer but what I say might be applicable only in the US whereas this question is tagged european union.

All the house mortgages that my wife and I had (as a two-earner couple) had a clause stating that the mortgage became immediately due if either of us passed away. In this event, the surviving spouse could negotiate a new mortgage to pay off the one immediately due, but that was yet another hassle that the survivor would have to take care of "immediately" amidst all the other things that also needed to be taken care of even more immediately. So, we both had term life insurance policies to cover the balance due.

A typical (guaranteed renewable without medical exam) term-life insurance policy has fixed face value and premiums that increase in steps; every year, or every two years or every five years or every ten years etc. for the duration of the policy (15 or 20 or 30 years). It is/(was?) also possible to get a term life policy with fixed annual premium for 15 or 30 years but with face value that decreases much as the balance due on a mortgage decreases: very slowly in the initial years and with a more rapid decline towards the end of the term. We, not the mortgage company, were the beneficiaries on each other's policies so that this was not like PMI in which the beneficiary is the mortgage company. That is, we could use the money for other purposes if the balance was small enough not to need the entire sum received from the life insurance company.

Now, all this was 30 years ago when most mortgages in the US were issued by entities called Savings and Loan Associations (anyone remember them?) and maybe modern mortgages have different clauses in them. But I would recommend reading the mortgage carefully, and if an "immediately due on death of either mortgagee" clause is still there, then serious consideration should be given to getting life insurance on both spouses to cover the mortgage balance due. The "linking" to the mortgage is not really necessary; one should have enough total life insurance so that the surviving family can manage on just the income of the surviving spouse plus judicious spending of the life insurance proceeds, as well as enough money to support the (soon-to-come) children of the OP at least through adulthood (or college) should both parents pass away.