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 significantlyÂ 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?