Taking out a mortgage can be a scary prospect. Now imagine if one of the household’s breadwinners dies. How will you make the payments? Mortgage protection insurance is one way.
You can purchase a policy when you buy your home. Often, you must buy it within a certain time period after closing escrow, generally up to 13 or 24 months. However, some companies may allow up to as much as five years.
The idea behind mortgage protection insurance is straightforward: You pay a premium, which remains the same for the duration of the policy. If you die during that time, the insurance pays out your death benefit.
“Mortgage protection insurance is a life insurance program that gives you special benefits because you have a mortgage,” says Andy Albright, president and CEO of National Agents Alliance, the largest mortgage insurance broker in the nation.
The type of death benefit you receive depends on the type of policy you purchase. Mortgage protection insurance has evolved, Albright says. It used to be that your death benefit would be the outstanding balance on your mortgage. Today, most mortgage insurance policies are designed to pay out the full amount of your original mortgage, no matter how much you owe.
The beneficiary can often use the remaining money for anything.
If you pay off your mortgage early, you keep the coverage until the term of your policy expires. Some insurers will allow you to turn that mortgage insurance into a life insurance policy, Albright says.
Another benefit of mortgage life insurance is that you can have protection if you become disabled or lose your job. A policy may continue to pay your mortgage until you’re able to get back on your feet financially again. Read the fine print to make sure this is part of your policy if this interests you.
Don’t confuse mortgage insurance with PMI
If you’ve purchased a home with less than 20 percent down, your lender probably required you to purchase “private mortgage insurance,” or PMI.
While mortgage protection insurance will pay off your loan when you die, PMI is intended to cover a portion of your loan if you default and the benefit is paid to your lender, not your family. PMI is designed to reduce the risk faced by lenders. PMI might make it easier for you to get a mortgage, but you need another form of life insurance to guarantee your loan can be paid off should you die.
How mortgage insurance is priced
Insurance companies consider things like your age, if you smoke and the principal amount of the mortgage (many insurers do not count smoking cigars or dipping tobacco). Also, you may not need to take a physical exam to buy mortgage protection insurance, depending on the insurer.
“It opens the window to get life insurance without having to jump through all the hoops,” Albright says.
The national average for a mortgage amount is $120,000, Albright says. Assuming that’s your mortgage, you would pay roughly $50 a month for a bare minimum policy. If you want to add riders (such as “return of premium” or living benefits), you may pay around $150 a month. Out of roughly 70 million homeowners in America, only about 2 percent have mortgage insurance, Albright says.
Some insurance companies may require your policy be reissued if you refinance your mortgage, but it’s not the norm, Albright says. That would probably be the case if you bought a policy that pays out only the balance left on your mortgage.
You may also purchase mortgage protection insurance that provides joint coverage for both you and your spouse. This means the death benefit will be paid when either of you dies. The premium for such joint coverage may be lower than what you’d pay for two individual term life insurance policies. Deal Directly With One of the Best Life Insurance Companies
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Alternatives to mortgage protection insurance
Term life or permanent life insurance are alternatives to mortgage insurance. While most mortgage protection insurance policies today are similar to term life policies because the death benefit could be used to pay the mortgage, funeral expenses, education costs or anything else, you can purchase larger amounts of life insurance.
With mortgage insurance protection, your death benefit will likely be capped at your initial mortgage amount. (You may be able to purchase more, up to 20 percent of your mortgage amount.)
The advantage to purchasing mortgage protection insurance is that it may be cheaper than life insurance and you may not be required to undergo a medical exam.
There are pros and cons to going with mortgage insurance, term life, or permanent life insurance:
|Mortgage insurance||Guarantees your mortgage is paidCan help if become disabled or job loss||No medical exam usuallyDeclining payoff.Payout goes to mortgage company first|
|Term life insurance||Better death benefitLower rates||Medical exam requiredOnly covers you for a period|
|Permanent life insurance||Better death benefitCash value||More expensiveMedical exam usually|
*courtesy of insure .com