Have you heard this term? Maybe you got a letter in the mail from a company offering insurance to cover your mortgage? But why would you need mortgage insurance to cover your mortgage? There are a couple of reasons, one is to temporarily make your mortgage payments should you be unable to work and the other is to pay off your mortgage should you die prematurely.
Mortgage Protection Insurance is indeed an insurance policy, with your mortgage company being the beneficiary. Such companies monitor home sales and contact the new owners about buying a policy. It sounds attractive enough. Sometimes people get into situations where they’re having problems paying the mortgage, but the situation is temporary. Perhaps someone got into an accident and it will take a few months to recover to the point of returning to work.
The premiums for these policies will vary based upon your age, the amount of your mortgage. But one of the negatives about a mortgage protection insurance policy is the limitation of what can be paid. It’s fairly straightforward. When you die, the payment goes directly to the mortgage company. This is different than a standard life insurance policy, for example. With a life insurance policy, your heirs get the proceeds who then decide how to disburse the funds. They may decide not to keep the home but to sell it. Mortgage protection insurance policies don’t allow for that. The benefit also diminishes over time as the mortgage balance is paid down.
Mortgage protection insurance is matched up directly with the mortgage balance. Whatever the balance is, the mortgage is paid off. There’s not any concern that there won’t be enough money to pay off the remaining mortgage balance. Furthermore, mortgage protection insurance doesn’t require very much qualification at all. With a life insurance policy, the premiums are determined by multiple factors such as the age of the policyholder but also, and more importantly, the current health of the applicant. Poor or declining health when applying for a life insurance policy can be cost-prohibitive. That makes sense though for a life insurance company to write a policy based upon the likelihood of someone passing. With mortgage protection insurance, there is a limited need for someone to be evaluated and underwritten.
One quick note here, mortgage protection insurance is not to be confused with private mortgage insurance, or PMI. PMI is a policy lenders require when the down payment on a home is less than 20 percent of the sales price. The beneficiary with PMI is the lender.
Mortgage protection insurance premiums can also be awfully expensive. Many times, the premiums are twice as high as what a similar term life insurance policy would be. At the same time, as the mortgage balance decreases so does the benefit but because the premiums are what is referred to as “level premium” the premium payment doesn’t change. That means someone pays the very same amount throughout, regardless of the balance. If the mortgage balance is paid down to $50,000 overtime, the mortgage protection insurance policy payment is the same as when the policy was first taken out for a mortgage balance of $300,000.
So, is mortgage protection insurance worth it? Probably not for most, especially if you’re eligible for a competitive term life policy. This shouldn’t deter you from weighing the pros and cons. The initial presentation for a mortgage protection insurance policy can be rather convincing. It can make complete sense and designed to make sure the mortgage is covered in the event of your death instead of leaving the responsibility to your heirs.
When someone inherits a home, they’re often not sure what to do with it. And most of the time they’re not only not expecting the property but have never owned a second home before. Should the heirs sell it? Maybe keep the home and rent it out for the cash flow? When someone dies there are so many other things to tackle. The fewer things to address during that time, the better. Mortgage protection insurance directly addresses that problem.