This is one of those kinds of insurance that doesn’t get the amount of attention that it should. Here’s a question for you. If someone were to pass away before completing mortgage payments, what would happen to the house? The chances are that you gathered that foreclosure would be on the way unless someone else picked up the slack with the payments.
That assumption isn’t wrong, but now for a few more questions. What if no one else picked up the slack? What if no one else needed to pick up the slack? What if there was a way to take care of the mortgage payments without the need for another family member or loved one to get involved? It’s not as impossible as it sounds.
A home is one of the most expensive assets that someone can purchase. This is the reason that almost all home buyers go the route of getting a mortgage. It stands to reason then that there would be a safety net that could help if the mortgage payer suddenly became unable to honor the payment commitment any further. This is where mortgage protection insurance comes into the mix. By the time you’re done reading, this concept that was probably unknown to you should be a lot clearer.
What Is Mortgage Protection Insurance?
Mortgage protection works like a special-purpose life insurance. However, instead of providing a payout to your family with no dedicated purpose, such a policy revolves around your mortgage payment.
Under normal circumstances, if you become unable to honor your mortgage payments due to disability or death, your loved ones would need to take up the mantle, or the house would be repossessed.
In terms of its workflow, there’s not much difference from a life insurance policy. In such a policy, after you purchase it, you pay your premiums, then it ends when the tenure has passed. Should you die during that tenure, there is a death benefit that is paid to the beneficiaries you indicated when you were buying the policy.
Mortgage protection is similar, but there are differences. The first is the beneficiary listing. With a standard life insurance policy, you’d choose loved ones that get a portion of the death benefit. The beneficiary in a mortgage protection insurance policy is the lender of the mortgage. This is because the idea of such a policy is to pay off the remaining balance on your mortgage when you are no longer able to do so.
There is also the matter of the term. You could choose a 15-year term, a 45-year term, or any multiple of five in between. Since the idea is to insure your mortgage, the lifetime of the policy tends to match the term of your mortgage. Why would you insure a 30-year mortgage for 45 years? Note that there are other factors, such as the state of your health and your age, that also affect the maximum length that you are allowed.
Finally, the death benefit attached to the policy is not constant, as it is with a traditional life insurance policy. Instead, it starts high, and then it falls after about five years. The reason for this is that it exists for coverage of your mortgage payment. Remember that as you continue to pay your mortgage, the balance that remains consistently falls, so the insurance amount doesn’t need to stay constant.
Most mortgage lenders offer you the option of purchasing mortgage protection insurance during the process of your getting approved for a mortgage. Note that such a decision does not need to be made right off the bat. Mortgage protection insurance is offered as an independent policy by many institutions. The best part is that you don’t need to have a mortgage with a provider to access the facility.
This means that you can take the time to shop around as you see fit until you find a policy with the kind of terms that suit you best.
In the event of your death or disability, the payment is made using a simple one time process. The insurance provider simply writes a check for the remainder of your mortgage amount, which is then sent to the lender to close out the mortgage. You should note that not every insurance provider is willing to cover the entire bill if you become disabled.
In this instance, the figure that is covered depends on a figure that was agreed upon in your contract. There is another kind of insurance, known as private mortgage insurance, that does something similar. For this reason, people who are aware of these insurance types tend to confuse them. However, they are not the same.
Private mortgage insurance has no benefit to you. It is built to pay off a mortgage lender if you should default on the mortgage.
Advantages of Mortgage Protection Insurance
Now it’s time to review some of the amazing benefits of Mortgage Protection Insurance:
Peace of Mind
Life is very unpredictable. Sometimes some of the healthiest and able-bodied people pass on or become completely disabled literally overnight. When you have a house that you pay for over decades, you don’t want that house to be taken one day because you could no longer make the payments. That would render all your payments up to that point useless.
Though you don’t want to be thinking along those lines, it is a reality that you deal with. Just the possibility is enough to seriously worry people. With mortgage protection insurance, you don’t need to be scared, once you’re paying your premiums. You can rest assured that, even if you’re no longer around, the mortgage payments don’t stop until the mortgage is paid in full.
It is very unlikely for you to be turned down for mortgage protection insurance. This is the reason that it’s basically offered to you on a silver platter while you’re getting your mortgage approved.
Though life insurance policies are a good alternative, the acceptance rates for them are much lower. Therefore, you can always look to a mortgage insurance policy, since it’s easier to get.
Disadvantages of Mortgage Protection Insurance
There are several downsides to note where this kind of insurance is concerned.
As state before, the value that these insurance policies have is not fixed. They are closely linked to the balance of your mortgage, so the potential payout continues to decline as your mortgage balance declines.
What makes this frustrating is that there is the likelihood that your premium doesn’t change. This means that you find yourself in a position where you’re progressively paying the same for less.
Single Mortgage Coverage
There are many reasons that you’d be interested in taking out a second mortgage on your home in the form of a home equity loan or a line of credit. Unfortunately, mortgage protection insurance is only concerned with your first mortgage. Therefore, if the policy should ever need to be used to clear the mortgage, there’s still another source of credit that could still be the reason that the house is lost.
Nothing for Loved Ones
The check that is prepared to clear your mortgage when you are no longer able to do so is sent directly to the mortgage lender. Your family doesn’t get it. Even if they did, it wouldn’t have any benefit to them, as the amount is exactly what is needed to close out the mortgage.
Pinning Down the Price
Mortgage protection insurance costs can be very ambiguous and hard to pin down. For some reason, the cost of this insurance type doesn’t ever seem to settle. There are constant revisions, which make it hard for potential customers to get a quote for a price that is current.
Choosing Your Agent
As stated before, you should shop around when looking for a mortgage protection insurance provider. In fact, you should do so regardless of what kind of insurance you are looking for.
It’s all about finding the terms and conditions that best suit your needs. You may find some amazing benefits with some providers that don’t make an appearance elsewhere. For example, some insurance providers are willing to throw in a stable death benefit. Therefore, though the amount allocated to mortgage clearance decreases as you pay off your mortgage, what your family could stand to gain if you pass away stays consistent.
Make sure that you have a comprehensive understanding of what the policy covers and what it doesn’t. Remember that there are many reasons that could result in your inability to cover the mortgage. While many of these may be covered in the normal course of becoming disabled, some others are not.
Mortgage Protection Insurance Alternatives
There are alternatives that you can consider if you don’t like the terms attached to mortgage protection insurance.
A term life insurance policy is one of the most popular. That’s because the terms are lest restrictive, and the benefit can be much better. For example, you have a much broader base available in the area of the beneficiary selection. You can select a charity or even a school if you so desire. Of course, you can select your loved ones and family members too. The payout from such a policy is large and tax-free.
Additionally, there isn’t a drop in the value of the benefit. A standard term life insurance policy was never designed around mortgages, so the value of your policy isn’t dependent on your mortgage balance. This allows your family to be able to clear your mortgage and other things, such as any other loans or responsibilities. Note that there is also an annuities option, which means that the payment can be collected like a salary.
There are also permanent life insurance options, which are great because they last for the duration of the policy holder’s life. Note, however, that these policies tend to be way more complex and expensive than the other alternatives.