Have you ever thought about buying mortgage protection insurance? Do you even know what it is? My husband and I first heard about mortgage protection life insurance from our mortgage company. They’ve been sending out little sales pitches along with our mortgage statements.
I’m usually skeptical about programs and accounts advertised by banks, but on the surface having mortgage protection sounded like a good idea, so I decided to look into it and find out what it’s all about.
What is mortgage protection insurance?
As the name implies, mortgage protection insurance protects your mortgage in case of hardship. A typical policy will cover mortgage payments in the event of job loss or disability, and will pay off the mortgage balance in the event of death.
In short, you agree to pay your carrier predetermined regular payments in exchange for the peace of mind of having your mortgage taken care of for your loved ones. Many of the policies I’ve looked at pay the mortgage lender directly.
Types of mortgage protection policies
The first concern I had was the return on the policy. As you continue making payments on the policy, your mortgage balance is (hopefully)decreasing. What benefit is there for you? Based on general trends, I see this as being very profitable for insurance companies and not a great deal for homeowners who pay off their mortgage.
I found out that you can adjust your insurance policy to make it more worth your while.
Level benefit term policy
This sounds pretty much like a term life insurance policy. You can set it for a specific time period (such as 20-30 years) and pay a locked-in premium. This typically doesn’t give you the flexibility of a regular life insurance policy, though, as any benefits are intended to go specifically toward your mortgage.
Return of premium term policy
If you are still alive when your mortgage is paid off, this type of policy will return all premiums that you’ve paid. You won’t get any of the accrued interest, but that’s still a nice chunk of money to have once your biggest debt is paid off. The other downside is that you can be disqualified if you miss any payments.
Who Benefits the Most?
As with everything in the financial realm, you really have to look at the numbers and your circumstances to determine if mortgage protection insurance is right for you. Every family can come up with something different, so I’ll just share some information for you to look at on your own time.
Some borrowers find mortgage protection to be an easier policy to get than your typical life insurance, as a physical exam may not be required.
Rates, though, can be significantly higher than a term life insurance policy. Andy Albright of the National Agents Alliance estimated the average costs of mortgage protection:
The national average for a mortgage balance is $120, 000. For such a mortgage, you would pay roughly $50/month for a bare minimum policy. If you want to add riders (such as “return of premium” or living benefits), you could end up paying as much as $150 a month.
That comes out to $600-$1, 800 a year out of the policyholder’s pocket. Not surprisingly, only about 2% of American homeowners have mortgage insurance, Albright says.
For term life insurance a a 40-year-old non-smoker with a $500, 000 term policy will pay somewhere between $352-$641 a year. That’s a significant savings for much higher coverage.
I honestly think that you should seriously consider getting term life insurance rather than a mortgage protection policy. It’s cheaper, and you can use the money saved to pay down your mortgage faster if you want.
If you’re concerned about disability, you can back up your standard life insurance policy with a long term disability insurance policy, which may be a good idea to have whether or not you have a mortgage.
Thoughts on mortgage protection insurance
I know many people have strong opinions on getting the right types and amount of insurance to protect their family. I’d like to get your take on it to make sure I’m weighing the pros and cons correctly.
How many of you have mortgage protection insurance? How hard or easy was it for you to obtain? What are the premiums like for you? Do you think it’s a good or a bad deal?
I would like to say thanks for all the great comments about mortgage insurance. I thought this would be great just in case I got hurt or died. Now, I will look to upgrade my life insurance to cover all expenses. Knowledge is power…
David, thanks for your feedback. I was looking more to protect my mortgage in case I get laid off and so on. I am a consulant and work is based on client work. I have been employed for 5 years with my firm, but need some insurance. So what would you recommend? I have received notices in the mail where companies would pay off all the mortgage if I died, unemployed, or become disabled. Unfortunately, I never kept any of those mails. Please let me know as I am worried about not paying my mortgage due to my line of work.
thanks!
Dee, the point is that generally there are no “good companies” for mortgage cancellation policies. If you can get simple term insurance that would cover the amount but which could also be used for other things if desired, you are far better off.
what are good companies to enroll this protection?
In Canada, mortgage insurance sold by the banks is never underwritten when you buy the insurance. So you can spend years paying the premiums, and then someone dies, and then they look into whether they would cover you. They then find pre-existing conditions and other health issues, and deny payment. This is a HUGE problem in Canada. So no one in Canada who is in the loop buys mortgage insurance. They buy term life from a reputable insurance company who underwrites you when you buy the policy – if they deny you then you don’t get insurance – not pay for 20 years thinking you have insurance. Plus with term life you have money to pay for a funeral, or college tuition or whatever else may be more pressing then the mortgage, right that minute.
I would never buy Mortgage Protection Insurance. The only one you are protecting is the lender, not yourself or your spouse.
If you are worried about your spouse paying the bills upon your death, get a large enough life insurance policy on yourself, and maintain an emergency fund to cover the gap until your life insurance pays!
Don’t protect a lender, ever!
One important aspect of Mortgage Life Insurance is that it is usually guaranteed issue if purchased through the mortgage-holder.
For anyone who is uninsurable otherwise, it could be an important component of a estate plan. My husband has a congenital heart defect that makes him unable to obtain term insurance AT ALL except through his employer’s group plan that is also guaranteed-issue.
We have cobbled together a variety of guaranteed issue policies that will pay off the house & other debt and fund a college account for our 4yo, in the event of his death prior to our being debt-free including house. It is better than nothing.
Another detail about these policies is that the balance you’re insuring goes down over time. So if your mortgage is $120k today then you’ve got $120k coverage. But you’ll be paying down the principal over time so your benefit gradually decreases. That basically means its worth less than half of a $120k of comparable term policy.
Mortgage insurance benefits the bank more than the borrower.
They aren’t even a good deal if you are in poor health. A 50 year old smoker could get $125k of 20 year term for $1300 a year.
At one time, I taught a college life and health insurance course. I believe mortgage cancellation insurance is an incredibly bad deal in most cases. In addition to the very good points you raise, here’s another:
If you pass away, your spouse may not *want* the mortgage paid–especially if there are other, pressing needs and/or you have a super-low interest rate. A non-dedicated life insurance plan gives flexibility.
Let’s say that you buy additional term coverage at minimal cost, which in pure term would decrease the coverage over time to hold the premiums low. If you design it carefully, this coverage could cover the balance of the mortgage, if required–which after all would also be decreasing.
For your information, mortgage cancellation insurance is among the most marked-up of all insurance plans. With today’s low term rates, for most folks it simply doesn’t add up.
The one major rider I recommend for term insurance is guaranteed insurability, usually on a ten-year fixed term policy as a good example.
Note, too, that as time passes you probably need less coverage as kids grow up and leave home and other responsibilities diminish. However, the need for very good major medical and disability coverage is often far more important than life insurance itself.
I’m a proponent of the view that you should just buy a big enough life insurance policy to cover all of your financial obligations rather than these sorts of one off protections. Same goes for disability insurance… Buy a suitable LTD policy instead of attacking the problem piecemeal (and paying through the nose while you’re at it).