The 411 on Mortgage Protection Insurance

There is no doubt that purchasing a home will be the biggest investment of most people’s lives. It will be one of the most exciting times, but can also be very stressful. It is easy to get burnt out by a host of new chores and financial worries that may have never crossed your mind.

In this article we will give you the “411” on how to protect you loved ones if you can no longer make mortgage payments, whether from disability or death. After reading this article you will be able to make an informed decision on what is the best insurance to purchase to protect your family and your home. This will be one errand that you can mark off your list.

This is commonly referred to as Mortgage Protection Insurance.

PMI (Private Mortgage Insurance) is NOT Mortgage Protection Insurance

When you bought your house and did not put down the 20% required then your lender required you to purchase PMI. PMI covers a part of your loan (usually covers the 20% that wasn’t put down) in the event you default. The benefit is paid to the lender and not your family. PMI protects the lender by reducing risk, but does nothing for the borrower.  PMI does not pay off your mortgage if you die.

What is Mortgage Protection Insurance?

Mortgage Protection Insurance is a term life policy, in most cases, that is used to pay off your mortgage in the event of an unexpected death.

Some of these policies also come with riders that will pay all or some of your mortgage payments if you were to become disabled and in some cases lose your job. Mortgage Protection Insurance is used to protect your biggest investment, buying a home, by protecting you in the event of death, disability, or job loss.

Why do I need Mortgage Protection Insurance?

As we mentioned before, purchasing a home is going to be the biggest investment of most people’s life. With this said it is important to protect this investment just like any other.

These days most homeowners have a 2 salary income paying the bills, and a mortgage payment is the highest recurring bill each month.

Imagine if all of sudden one of those incomes stopped?

What bills would go unpaid?

What Happens to my Mortgage in the event of a death?

Below are five scenarios in the event of a premature death to a contributing family member:

In each of these instances, Frank Donnelly, chairman of the Mortgage Bankers Association of Metropolitan Washington, D.C., says heirs should contact the lender soon after a death to discuss their options.
While deciding what to do, it’s important to keep the loan current, Donnelly says.

“You don’t want it to go into foreclosure.”

Most mortgages also require that the home be kept in reasonable repair, Donnelly says, so taxes and insurance should be paid up.

Scenario 1:

Your beneficiary takes over the mortgage.

“Provided they have the income or the money to do so!”

Most of the time federal law allows for the transfer of the loan to a spouse or relative.

Although most home loans contain a due-on-sale or acceleration clause that allows a lender to demand immediate and full payment upon transfer or sale of the home, transfers due to death are exempt.

This means your beneficiary would take on your home loan with the same interest rate and payment you have.

“But if your heirs would be strapped for cash to do so, an adequate life insurance policy would solve the problem.”

Scenario 2:

Your beneficiaries refinance the mortgage.

“Provided they have the income or the money to do so!”

If beneficiaries want to keep a home, in most cases they would simply refinance the loan. This is especially true if they can get a lower interest rate or reduced monthly payments.

If your beneficiaries can’t qualify for a new loan but can afford to make monthly payments, they can always keep the original mortgage.

“But if your heirs would be strapped for cash to do so, an adequate life insurance policy would solve the problem.”

Scenario 3:

Your beneficiaries get the property free and clear.

“Provided they have the income or the money to do so!”

If your relatives are lucky, your estate may have enough funds to simply pay off the loan. In this case, you’ll have to direct in your will that other assets in the estate be sold to retire the mortgage.

If you took out a life insurance policy that would provide income to make the payments or pay off the balance then your heirs would have some flexibility in what can be done.

Scenario 4:

Your beneficiaries can’t afford the monthly payments. In this case, they can sell the home or, in the most extreme case, walk away.

In instances where the loan is underwater, walking away might be the wisest move. They can just give it to the lender and if it’s really underwater, and it looks like it’s going to stay underwater, it makes sense to walk away.

If there’s a sentimental attachment to the home and beneficiaries want to keep it then you have to try to get together with the lender and see if you can work something out. In some instances, a lender might forgive some of the loan balance.

“But if your beneficiaries would be strapped for cash to do so, an adequate life insurance policy would solve the problem.”

If you have to sell a home that’s worth less than what’s owed, the lender could agree to a short sale in which the estate would not be liable for any deficiency. In case of a short sale, the estate would be off the hook for any loss.

In a foreclosure, on the other hand, the lender could seek to recoup losses from the estate. But if there is nothing there then they won’t bother.

Who Sells Mortgage Protection Insurance?

1. Banks
2. Life Insurance Companies

How Does Mortgage Protection Through My Bank Work?

When you purchase a home through the bank, chances are that they offered you some type of mortgage protection insurance.  These types of insurance are usually written as a decreasing term policy. The death protection decreases which usually correlates to the decrease in the amount owed on your mortgage.

The pros to buying mortgage protection insurance through the bank are:

• The policies have very little underwriting and higher acceptance rates than a traditional term policy. If your unhealthy or had health problems in the past this may be a good option
• Usually no underwriting involved/Guaranteed Issue
• High risk jobs are usually not an issue
• Premiums remain level

The cons to buying mortgage protection insurance through the bank are:

• The death benefit decreases each year.
• The mortgage company is the beneficiary of the policy, not your loved ones. Lose control of the proceeds.
• Does not contribute to final expense costs, such as funerals.
• The mortgage protection insurance will have to be re-written if you refinance your mortgage, the bank sells your loan, or move.

Mortgage Protection Insurance Through Life Insurance Companies

If you have recently bought a house or even refinanced, there is a good chance that you received a direct mailer soliciting “Mortgage Protection Insurance”.  They usually urge you to complete and send back a form to receive additional information.

These mailers are usually vague, express urgency, and often are dressed up to look like they are coming from the bank that financed your home. It can be hard to understand what is being offered and most of the time the additional info you requested when you return the form, usually is a call from an insurance agent to set an appointment.

These types of letters are either coming from an insurance carrier directly, lead marketing company, or in some instances, the agent themselves may be mailing the flyers. In all cases, these flyers basically say the same thing.  They are offering a mortgage protection program to people who have just closed on a house or refinanced a house.

The type of mortgage protection insurance being offered is a traditional term life insurance.  These policies can be dressed up with riders to protect in the event of disability, unemployment, and illness.  Below are a list of features offered with most mortgage protection programs offered through a life insurance carrier.

1. CHOICE OF BENEFICIARY– With the plan that you choose, you decide who receives the proceeds from the program in the event of death.
2. PORTABLE– If you sell your home and purchase another, or refinance your present home, this plan will simply move with you to continue to protect your next mortgage. Regardless of how many times you move, you will never need to qualify for another plan or risk losing the one that you have.
3. DEATH BENEFIT REMAINS LEVEL– The death benefit remains level for the length of the policy.
4. MONEY BACK OPTION– You have the option of receiving a refund on all the premiums that you paid into the program if you live!
5. DISABILITY– This feature will pay you monthly income payments if you become disabled for a period of up to two years.
6. WAIVER OF PREMIUM– Another disability feature, this option will pay your premium if you should become disabled.
7. TERMINAL ILLNESS BENEFIT RIDER– If you are diagnosed with a terminal illness or condition, you can receive 80% of the policy’s death benefit to help with expensive medical costs.
8. LIVING BENEFITS RIDER– If you become sick with a serious health condition such as, cancer, heart attack, stroke, etc., you can access up to 24% of death benefit annually to help pay with an costs associated with your illness.
9. 24 HOUR COVERAGE FOR ACCIDENT OR SICKNESS– Unlike many mortgage plans, this program will pay benefits regardless of whether the death/disability occurs from accident or sickness and whether you are at work or home.

No-Medical Mortgage Protection Insurance vs. Medically Underwritten Mortgage Protection Insurance

Most life insurance carriers these days offer some type of no-medical term life insurance policy and a fully underwritten term life insurance policy.

In many cases the premium difference between a no-medical policy and a medically underwritten policy is just dollars. If your blood work is a concern then paying the extra premium will be worth it in the long run.  Also a term life insurance policy that requires no exam usually has fast approvals. Some approvals are within minutes!

Whats the difference?

A Medically Underwritten Life Insurance Policy

When you apply for a medically underwritten life insurance policy you are required to go through a paramedical exam. How this works is the company pays for a licensed examiner to set up an appointment, usually takes place at your home. They will check in most instances:

• Height
• Weight
• Blood Pressure
• Draw Blood
• Take a Urine Sample

Depending on your age and the amount of life insurance, an EKG can be a requirement.  All this done at the expense of the life insurance carrier.

Your lab results are then forwarded to the life insurance carrier who base their decision/offer on those labs. In some cases an APS (Attending Physicians Statement) may be ordered if extra information is needed.

The one drawback to medically underwritten policies is they can take time to be issued. Typical time for a healthy individual is 2-4 weeks while it could take 4-8 weeks for someone with health issues.

The major advantage to medically underwritten policies is if you are truly healthy the savings over a 20 or 30 year term can be a considerable amount.

A No-Medical Life Insurance Policy

A no-medical life insurance policy is a life policy that the insurance carrier doesn’t require an paramedical exam taken. These policies are still underwritten and not guaranteed issue. These policies should be considered first by certain clients. Some examples would be:

• If you haven’t had blood work done in the last 3 years and are not sure how your labs would turn out, this is a good route to take.
• If your height/weight, blood pressure, cholesterol, or blood sugar falls out of the life insurance carriers preferred rates requirements.
• If you are a student, under employed, or unemployed. No medical life insurance policies will offer up to $400,000 of coverage for students and the unemployed, while most medically underwritten life policies will offer up to $100,000 with a few insurance carriers that will not offer coverage at all.

Where should I purchase….Bank or Life Insurance Carrier?

In most instances, if you are healthy then purchasing your mortgage protection insurance through an insurance carrier is going to be a better option. Usually the premiums are around the same price, while the death benefits remain level with an insurance carrier.  Life insurance carriers also offer a variety of riders that can insure all aspects of your mortgage. We recommend consulting an experienced independent insurance agent to discuss if a medically underwritten life policy or a no-medical life policy best fits your situation.

If you are un-insurable or have a high risk job and cannot qualify for a traditional term life insurance policy then a policy purchased through the bank is going to be your best option.

We always recommend to explore all your options before making a decision on where to purchase your mortgage protection insurance policy.

Top Ten Life Insurance Carriers that Offer the Best Mortgage Protection Insurance

1. American National Life Insurance Company
2. Foresters Life Insurance Company
3. Mutual of Omaha
4. Transamerica Life Insurance
5. Assurity Life
6. Sagicor Life
7. Protective Life
8. American General Life
9. North American Life
10. Ameritas

Each of these companies offer a broad range of products and riders for mortgage protection insurance. They are all “A” rated with A.M. Best and provide exceptional customer service. Always consult with an experienced independent agent to help guide you to the company that best fits your situation.

Term Life Insurance vs. Permanent Life Insurance…which is best for Mortgage Protection?

Term life insurance is going to be the simplest and most affordable way to protect your mortgage. Term life also comes with an option to add more riders than most permanent policies.  With term life you can pick how long you will need the coverage for and have it align with how long your mortgage runs.

Permanent Life Insurance is going to be more expensive than term, but with the right planning you may be able to use the cash value of these polices to help pay your mortgage loan off earlier than designed. These types of products are great way to protect your mortgage while working towards paying your mortgage off. If for some reason the cash value is not needed to pay off mortgage, it can be used for multiple options.

Our Thoughts

If you own a home, just bought a home, or even thinking about buying a home you will want to do your homework when it comes to purchasing mortgage protection insurance. Mortgage protection insurance is vital to making sure that your family and loved ones are protected in case something unexpected were to occur, whether it is disability, illness, unemployment, or even death. Work with an experienced agent that is able to show you multiple options if needed.

Frequently Asked Questions